Trump is enraged that the Fed didn't lower interest rates this week. He and many economists believes that lowering the Federal funds rate would lower the federal government's borrowing costs.
Maybe. That's only true if lowering the short-term rates doesn't lead to a rise in long-term rates due to inflation, as happened last year when Jerome Powell cut rates before the election to help boost Kamala Harris.
But there is an easier way for the Fed to lower the federal government's borrowing costs and the deficit by tens of billions of dollars without risking inflation.
End the Obama-era bank rule that essentially penalizes banks for buying U.S. Treasuries and holding them in their reserves. The Fed counts these Treasuries in its risk-insensitive "Supplementary Leverage Ratio," functionally treating them as ”non-zero risk” and requiring banks to hold capital against them. This is despite the fact that they are among the safest assets on the planet.
Treasury Secretary Scott Bessent has been promoting this Fed policy change. The current rules reduce the demand for Treasuries, drive up yields, and increase borrowing costs on the $28 trillion debt held by the public.
Bessent's fix is simple: exclude Treasuries from the SLR. That alone would increase banks' purchases of these bonds. The higher demand could lower Treasury yields by an estimated 30 to 70 basis points, saving Uncle Sam up to $70 billion a year.
This could enhance the financial stability of banks, increase bank lending, and reduce the budget deficit.
What is Powell waiting for?
