Federal Reserve Chairman Jerome Powell has been cutting interest rates all year. And President Trump hasn’t even noticed.
As usual, my point here is not about politics but about your money. In a nutshell, regardless of your political persuasion, if you own bonds in your portfolio — and most retirees do — you should give serious thought to making sure you own plenty of international bonds in addition to U.S. bonds. That’s not because they are necessarily going to do better, but because you want to diversify to lower your risks.
Read: Bond yields tumble as weak jobs report raises chances of a half-point Fed rate cut
And U.S. bonds entail plenty of risks.
Let me go back to the beginning. The latest jobs figures came out and they were weaker than expected. President Trump, as is his habit, went on the internet to call the chairman of the Federal Reserve names.
“Jerome ‘Too Late’ Powell should have lowered rates long ago,” the president posted on his family-controlled website Truth Social DJT. Trump added: “As usual, he’s ‘Too Late!’”
(To be fair, this was extremely mild compared to Trump’s previous posts about Powell.)
Trump’s criticism is that Powell is causing the economic slowdown by refusing to lower interest rates.
The issue here isn’t whether Powell should have cut rates or shouldn’t. It’s that he already has.
The Federal Reserve, of which Powell is chairman, controls only very-short-term interest rates. It does not (normally) control long-term interest rates, which are much more important for the economy. Those are controlled by the bond market, which consists of millions of individual investors operating in a free market. (I am old enough to remember when one didn’t have to explain these things, least of all to Republicans.) Nobody controls the bond market.
When investors buy bonds, they lend money. When they do that, unless they are insane, they want to make sure that they are going to get their money back, plus a reasonable rate of interest. If they lend money for more than a year or two, their concerns include the future rate of inflation. There is no point getting, say, a 10% rate of return on a bond over the next 10 years if inflation is going to run at 15% a year. You end up worse off than you started.
The Federal Reserve’s short-term interest-rate policy is critical for setting inflation expectations. Not only do higher short-term rates act as something of a brake on the economy, but they also tell bondholders that the Fed will be vigilant against inflation in the future.
As a result, by refusing to cut short-term interest rates this year Jerome “Too Late” Powell and his friends at the Federal Reserve have been doing sterling work reassuring the bond market. And as a result, that bond market has become less worried about inflation, and has therefore been driving long-term interest rates lower.
In other words, the Fed’s tougher policy on short-term rates has caused a fall in crucial long-term rates. You cannot make it into a second semester at business school without understanding this stuff.
The “yield” or interest rate on 10-year Treasury notes BX:TMUBMUSD10Y fell Friday morning by another 0.08 percentage point, to just 4.08%. That is now the lowest level since Trump took office in January, apart from a few days in April when the president’s “liberation day” tariff fiasco sent all financial markets into a tailspin.
The yield on 10-year Treasurys was 4.64% when Donald Trump was inaugurated president. Jerome Powell and the Fed, by holding their nerve, have managed to cut that interest rate by over half a percentage point since Jan. 20.
So complaining that Powell has failed to lower rates makes no sense.
The importance of Powell in this can hardly be overstated. Those long-term interest rates suddenly jumped in July when there were reports that Trump was about to fire the Fed chairman.
And that falling 10-year interest rate is great news for the economy. It is good news for companies that want to borrow money to expand, because the interest rate they pay on their bonds will be linked to the interest rate paid by the Treasury. It will be good news for the housing market: The interest rate on 30-year mortgages is linked to the yield on 10-year Treasurys; it is not linked to short-term rates.
In this space just over a year ago, I pointed out that if Powell and the Fed slashed short-term interest rates by a full half of a percentage point, it would almost certainly cause the bond market to panic — and would therefore send the interest rates on longer-term bonds higher. (They did, and it did.)
Where does this leave investors? President Trump is currently engaged in tightening his political control over the Fed. He already has two appointees among the seven governors from his first term. His nomination of Stephen Miran, and his move to fire governor Lisa Cook and replace her with someone else, are part of a process that may soon give him four of the seven. Powell is due to retire as chairman next May, assuming that Trump doesn’t use Beria’s Law — “Show me the man, and I’ll find you the crime” — to oust him sooner.
Read: Trump’s push for lower interest rates is on a collision course with government bonds
This means that the Fed will soon come under almost direct influence of someone who apparently does not fully understand interest rates and the bond market. Where this will lead is anyone’s guess.
It is possible — hopeful — that the Trump governors at the Fed, along with Treasury Secretary Scott Bessent, will make sure the Fed operates rationally. It is also possible that they won’t. You don’t know, and neither does anyone else. Including them.
Alongside that, we have the issue that we still don’t know what the legal status will be of the president’s tariffs. Or if there is any plan at all to replace their tax revenues if they are scrapped.
Bottom line? The U.S. bond market, particularly Treasurys, is now fraught with risks. Whether a 10-year Treasury note paying 4.08%, or a 30-year Treasury bond BX:TMUBMUSD30Y paying 4.78%, offers enough compensation for those risks is a serious question. Inflation-protected U.S. Treasury bonds, known as TIPS, are offering yields of inflation plus 2% a year or more over 15 years or longer. But how far we can rely on U.S. inflation figures is another serious question.
It is no surprise that investors have been fleeing the U.S. dollar DXY for almost everything else — from gold GC00 to bitcoin BTCUSD to Japanese yen USDJPY.
Under the circumstances, it makes sense to diversify your bondholdings as well as your stocks. Reasonable options include funds investing in developed- and emerging-market currencies and bonds.
There are plenty of options, including from low-cost fund companies such as Vanguard (Vanguard Total International Bond ETF BNDX, charging 0.07% in fees), iShares (iShares 1-3 Year International Treasury Bond ETF ISHG, charging 0.35%), State Street (SPDR Bloomberg Emerging Markets Local Bond ETF EBND, charging 0.3%) and many others. Currency funds include Invesco CurrencyShares Swiss Franc Trust FXF, charging 0.4%; short-term rates in Switzerland are 0% right now, so you will earn no income. Yet gold isn’t paying any income either, and that isn’t keeping investors away from the yellow metal.
Diversification: It isn’t just for stocks. Least of all now.