Trump's candidate for the post of Federal Reserve Governor, Stephen Miran, reminded of the existence of the 'third mandate' of the central bank, which could radically change the long-term monetary policy of the United States. This forgotten clause from the founding documents of the Fed can pave the way for more aggressive intervention in the bond markets.
Third mandate
Traditionally, the Fed is considered to have a dual mandate — minimum inflation and maximum employment. However, the foundational documents of the central bank include a third point: moderate long-term interest rates.
This third mandate has been ignored for decades, as most economists viewed it as a natural consequence of achieving the first two goals. Now the Trump administration is ready to use this legislative point as a legal basis for potential yield curve control and expanded quantitative easing.
The Federal Reserve Act of 1913 does indeed contain a mention of the third mandate regarding moderate long-term interest rates. Trump has long advocated for lower rates, criticizing Fed Chairman Jerome Powell for slow actions.
Instruments for influencing rates
The administration wants to actively suppress long-term interest rates. Potential tools include:
Increased issuance of treasury bills
Bond buyback
Quantitative easing
Direct control of the yield curve
Lower long-term rates will reduce the government's debt servicing costs amid a record national debt of $37.5 trillion. The administration also plans to stimulate the housing market through lower mortgage rates.
What is the yield curve
The yield curve is a graph that shows interest rates on government bonds with different maturities: from short-term (a few months) to long-term (10-30 years). Under normal conditions, long-term bonds yield higher returns than short-term ones — investors demand a premium for the risk of long-term investment.
Yield curve control means that the central bank begins to purchase long-term government bonds in such volumes as to artificially lower their yields to the desired level. In fact, the Fed will be printing money to buy bonds, forcing the market to accept low rates on long-term securities.
Impact on the dollar and cryptocurrencies
Christian Pusateri, the founder of the Mind Network encryption protocol, referred to the third mandate as "financial repression by another name," noting that it is very similar to yield curve control.
"The price of money is coming under tighter control because the age-old balance between capital and labor, between debt and GDP, has become unstable," he explained.
According to Pusateri, Bitcoin could absorb vast capital as a preferred hedging tool against the global financial system.
Arthur Hayes, the founder of BitMEX, also views this news as positive for cryptocurrencies, suggesting that yield curve control could send Bitcoin to the $1 million mark.
