Recently, the yield on 30-year U.S. Treasuries has surpassed the 5% threshold, which may explain why the Federal Reserve has remained inactive under pressure from the Trump administration. On the surface, this reflects the market's demand for long-term debt, but the deeper issue is: **the long-term stability of the dollar is being questioned**.
The logic behind the high U.S. Treasury yields
The 30-year U.S. Treasury yield has broken through 5%, which seems to be investors' expectation of 'high returns' on long-term debt. However, combined with the current trend of dollar depreciation, this is actually a 'numbers game'. Assuming an average annual inflation rate of 3% for the dollar, even if the nominal yield on U.S. Treasuries is 5%, the real yield would only be 2%. But if the dollar further depreciates and inflation exceeds the yield, the real return for investors could turn negative.
In other words, **when the dollar is in a prolonged depreciation channel, the attractiveness of a 5% yield is diminishing**. Why would capital still take the risk to buy? The answer is: there are no better options. But this logic of 'forced holding' is not solid; once market expectations deteriorate, funds may accelerate outflows from the U.S.
The vicious cycle of capital outflows and the U.S. Treasury market
If the Federal Reserve hastily cuts interest rates, it will further weaken the dollar's attractiveness, leading to increased pressure for capital outflows. And capital outflows mean reduced demand for U.S. Treasuries, forcing yields to continue rising. This creates a typical 'negative feedback loop':
- Rate cuts → dollar depreciation → capital outflow → reduced demand for U.S. Treasuries → rising yields → increased inflation pressure → the Federal Reserve is forced to maintain high interest rates.
Worse still, if the Federal Reserve ultimately has to resort to quantitative easing (QE) to take over U.S. Treasuries, this will directly push up inflation levels—something the Federal Reserve desperately wants to avoid. Thus, **the current 'inaction' is essentially a passive choice made by the Federal Reserve after weighing the risks**.
Shifting the blame to the Trump administration: a political game.
The Federal Reserve's dilemma is: **it cannot control the tariff policies of the Trump administration**. If tariffs remain high for an extended period, the prices of imported goods will continue to rise, making it difficult to ease inflation pressure. However, if the Trump administration lowers tariffs, inflation may drop in the short term, but this would weaken its political position and could even be seen as a 'compromise with China'.
From a certain perspective, **the Federal Reserve has actually thrown the 'hot potato' to the Trump administration**. As long as Trump does not actively adjust tariff policies, the Federal Reserve can continue to maintain high interest rates under the pretext of 'inflation not meeting targets'. Even if inflation spirals out of control in the future, the responsibility will be more attributed to Trump's economic policies rather than the Federal Reserve's monetary policy.
Trump's 'double-dealing' strategy
For Trump, lowering tariffs seems to be the 'optimal solution' for easing inflation, but this move contradicts his consistent hardline political image. A more likely scenario is: **first agreeing with the Federal Reserve to lower tariffs in exchange for a promise to cut interest rates, then imposing tariffs again under the name of 'protectionism'**. This erratic strategy may be puzzling, but it is not impossible for Trump, who excels at 'political maneuvering'.
Conclusion: The Federal Reserve's passivity and helplessness
The decision-making dilemma of the Federal Reserve is essentially the result of multiple intertwined contradictions.
- Economic aspect: dual pressure of inflation and employment;
- Political aspect: the game with the Trump administration;
- Market aspect: the fragility of the U.S. Treasury market.
Regardless of the final choice, the Federal Reserve is unlikely to emerge unscathed. What ordinary investors can do is to closely monitor the dynamics of Treasury yields and the dollar index, adjusting asset allocation strategies in a timely manner. After all, in this complex game, the only certainty is: uncertainty itself.
