00:00If you look at this chart, this is also as interest payments ballooned to more than a trillion dollars.
00:06Let's bring in Bill Dudley now because the chart alone says a lot.
00:10The direction of travel and the crowding out effect that it has.
00:13Now the question is, as you pose it too, what do you do about it?
00:17How do you begin to bring this down when rates have remained so high?
00:21The Trump administration has said what we're going to do about it is we're going to job on the Fed.
00:26We're going to cut long-term debt issuance.
00:28We're going to move more of the debt issuance at the short end.
00:31And we're going to make it more – financial institutions give them more incentive to buy Treasury debt by relaxing the supplemental leverage ratio.
00:39The problem with this is all these things are going to have very marginal effects.
00:42In fact, the pressure on the Fed is probably going to be counterproductive because if it's a close call to the Fed,
00:49they're not going to cut as opposed to cut because they don't want to perceive their rate cut as being driven by the Trump administration
00:56because that would basically reduce the Fed's credibility and could cause inflation expectations to become unanchored.
01:02Shifting the issuance from the long end to the short end, very small effects.
01:06Long-term rates are mainly driven by the expected path of future short-term rates.
01:11And the same thing with the supplemental leverage ratio.
01:13I mean, to really get interest rates down, what you have to do is something about the fiscal outlook.
01:17And the big, beautiful bill does not do anything positive in terms of the fiscal outlook.
01:22It adds about $3.5 trillion to the 10-year budget deficit.
01:27You know, obviously, if you get interest rates down, it would have a very powerful effect.
01:31One percent reduction in interest rates over the next 10 years would save you $3.5 trillion,
01:35about what the big, beautiful bill got you.
01:37But pulling that off, in fact, is very, very difficult.
01:41I think what the Fed should do, what the administration should do is, one, be more serious about fiscal consolidation.
01:47Number two, be more clear on what tariff policy is going to be,
01:50because I think that uncertainty ends up being embedded in higher bond yields.
01:55Stop attacking the Fed. That's just counterproductive.
01:58Doing more to improve the resiliency of the Treasury market.
02:02There's a bunch of things you could do to make the Treasury market more attractive.
02:05And if you did all those things, you'd probably have some positive effects on interest rates.
02:09But the fiscal thing is the biggest thing that they need to address.
02:12I am curious, though, Bill, there's been a lot of discussions about some of the fiscal policies,
02:16as well as some of the policies coming directly out of the Treasury Department in terms of how it plans to issue debt,
02:23the shorter end duration of focus, as well as other statements that the Treasury Secretary has made
02:28that almost seems to suggest that the Fed's impact by using rates as a mechanism to steer the economy
02:37might not actually be as effective as it has been in the past.
02:41I don't think that the Treasury can sort of undo what the Fed wants to accomplish by changing their Treasury issuance program
02:53maybe makes the Fed's job slightly more difficult.
02:55But at the end of the day, the Fed sets short rates, sets the path to short rates.
02:58That determines the path to long-term rates.
03:00That determines what's happening in the housing sector.
03:02It determines the valuation of equities versus bonds.
03:05So I think the Fed still has quite a bit of control.
03:06On that point, though, Bill, I'm sorry, if I can just interrupt, though, on that point on the short end of the curve,
03:11though, I mean, if the Treasury does put more pressure with regards to short-term bills
03:16and the amount of the supply that's out there, meaning if they restrict that supply to a certain extent,
03:21does that not give them maybe some modicum of control of the short end of the curve?
03:26Well, I think the short end is really based on where the Fed sets short-term interest rates.
03:30The market, I think, has tremendously elasticity.
03:33In other words, if you increase the supply of Treasury bills by a trillion dollars,
03:37I think the market can absorb that quite easily.
03:40And the long end, I think, you know, investors are much more segmented.
03:43So I think, you know, if you take away issuance in the long end, it can have a bigger effect.
03:46So I think that, you know, at the end of the day, the Fed sets the interest rate they pay on reserves.
03:50That sets all money market rates.
03:52I don't think the Treasury debt issuance makes much difference.
03:55I mean, we've seen that over the last, you know, six months when the debt limit was binding, right?
03:59The debt limit was binding, Treasury issuance was falling, it was less robust because of the binding debt limit.
04:06And, yeah, I haven't seen much effects on the yield curve.
04:09You know, I'm glad you brought up the big, beautiful bill,
04:11because there hasn't been a lot of discussion since it was passed regarding what the more immediate impacts will be.
04:18Is there anything inflationary about this bill to you, given the extent of the tax cuts?
04:23And do you see any other ramifications that are worth noting in the economy near term?
04:27Well, I think the big thing is that the bill is going to add to fiscal stimulus in 2026,
04:33because a lot of the household tax cuts are front-loaded in the bill.
04:38You know, reductions of taxation on tips, overtime, Social Security,
04:41all those things are going to happen relatively quickly.
04:46A hard thing to figure out on the fiscal outlook is how much are the tariffs going to be offsetting the fiscals
04:53in the big, beautiful bill, because the tariff is not really included in the calculations
04:57that you see from the Congressional Budget Office.
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