Why US Yields Will Rise

Fiscal Policy, Monetary Goal in Conflict

President Donald Trump’s Big Beautiful Bill was signed into law yesterday with much fanfare. But behind the triumphalism lies a deeper economic problem—one that will not be resolved with slogans or press conferences. The bill is expected to add between $3 trillion and $5 trillion to the national debt over the next decade, according to various independent forecasts. That comes on top of a debt burden that already stands at $37 trillion—over 120% of gross domestic product.

The timing couldn’t be worse. Interest payments on federal debt already surpassed defense spending in 2024, and now Treasury issuance will surge across all maturities to finance the bigger fiscal gap. The administration argues that the tax cuts and incentives embedded in the legislation will more than pay for themselves through faster economic growth. But that assumption is overly optimistic. Financing the deficits will require higher yields to attract sufficient demand for the securities, further raising the cost of servicing the debt.

The political battle now turns to monetary policy—and it is here that the conflict between the White House and the Federal Reserve becomes unavoidable.

President Trump has continued to lash out at Federal Reserve Chairman Jerome Powell for refusing to cut interest rates, calling him "stupid" and a "numbskull." But Powell has refused to buckle. Despite pressure from the administration, he has publicly and repeatedly stated that he will not resign before his term ends in May 2026—and that he cannot legally be removed by the President before then. The Supreme Court has also weighed in, affirming that Powell and other central bank officials are protected from dismissal except for cause.

That means Trump is stuck with a Fed Chairman he can neither tolerate nor fire for another ten months.

Rather than simply wait, the administration has floated the idea of naming a Shadow Chair—someone who would critique the Fed after every Federal Open Market Committee decision and articulate what the President believes the correct policy should be. This strategy, supported by Treasury Secretary Scott Bessent, is an attempt to shift the market’s focus from the actual decisions of the FOMC to the commentary of someone seen as a proxy for the President.

There are risks in making the move. If the Shadow Chair merely echoes Trump’s demands for drastic rate cuts—especially when economic data, such as the unexpectedly strong 147,000 jobs created in June, argue for caution—markets are likely to view the appointee as a sycophant rather than a credible voice. Criticizing the Fed for not cutting, or for reducing by only 25 basis points instead of 50 or 100, will only add confusion and volatility to fixed income and equity markets.

Worse, such a move could erode investor confidence in the independence of monetary policy—a pillar of U.S. economic credibility. Volatility in rates markets would push yields even higher, complicating Treasury’s job of financing an ever-larger deficit. That in turn would dampen business investment and household consumption, slowing the very economic growth that the White House is trying to speed up.

Underlying this standoff is a fundamental policy divergence. Trump sees the United States as having been taken advantage of by its trade partners and is willing to impose tariffs to correct those alleged wrongs. Powell, by contrast, must worry about the inflationary consequences of those very tariffs. His job is not to right perceived injustices in trade policy but to ensure that inflation expectations remain anchored.

If tariffs drive up import prices while fiscal expansion adds fuel to aggregate demand, the Fed may be forced to hold—or even raise—rates to fulfill its mandate. The result would be a toxic feedback loop: rising deficits, rising rates, and rising inflation expectations.

Put simply: The President’s fiscal and trade policies are pulling in one direction, and the Fed’s inflation mandate is pulling in the other. And in the tug-of-war between political ambition and economic fundamentals, yields will be the major casualty.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

www.srikumarglobal.com

@SriKGlobal

July 5, 2025

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