A New Fed Mandate Forces Bond Traders to Rethink Old Rules

For decades, investors assumed the Federal Reserve’s mission was straightforward: balance stable prices with maximum employment. That dual mandate shaped decisions from Alan Greenspan through Jerome Powell.

‍

So when Stephen Miran, President Trump’s latest nominee for the Fed Board, cited a third mandate the need for “moderate long-term interest rates” the bond market took notice. Analysts and traders debated what this rarely mentioned clause meant for policy and portfolios.

‍

As it turns out, Miran wasn’t inventing anything new. He was quoting directly from an overlooked section of the Fed’s founding statute. Still, for market veterans like Andrew Brenner of Natalliance Securities, the implications are significant.

‍

His concern: Trump’s team may be preparing to use this “third mandate” as justification to intervene more directly in long-term Treasury yields a move that could undermine the Fed’s independence.

‍

Brenner pointed out in a recent note that the administration discovered a poorly defined clause in the Fed’s original framework that could, in theory, allow much greater influence over long rates. For now, such policies aren’t in play, especially as bond yields have already declined this year on softer labor data and expectations of future rate cuts. Historically, the third mandate has been seen as a natural byproduct of controlling inflation.

‍

Still, the renewed focus is enough for some investors to adjust their bond strategies. If policymakers attempt to cap long-dated yields, the potential side effects could include higher inflation, complicating debt management in the long run.

‍

While short-term rates set by the Fed get most of the attention, it’s the long end of the curve that truly shapes borrowing costs across the economy. Mortgage rates, business loans, and trillions of dollars in other debt depend on 10-, 20-, and 30-year yields traded in global markets.

‍

Treasury Secretary Scott Bessent has repeatedly emphasized the importance of keeping long-term borrowing costs in check, even invoking the Fed’s statutory three-part mandate in a Wall Street Journal op-ed criticizing central bank “mission creep.”

‍

“This is clearly a priority,” said Lisa Hornby, head of U.S. fixed income at Schroders, pointing to the administration’s desire to stimulate housing demand.

‍

George Catrambone of DWS Americas noted that if long-term yields remain elevated despite Fed rate cuts, Washington will likely act. That could mean more Treasury bill issuance paired with buybacks of longer bonds, or even large-scale bond purchases by the Fed, reminiscent of quantitative easing (QE).

‍

Bessent has expressed skepticism about QE in the past but has left the door open for its use in emergencies. Another option could be Treasury leveraging the Fed’s balance sheet to absorb long-term supply.

‍

For investors, the possibility that the “ultimate buyer” steps in raises risks for those betting against long maturities. Daniel Ivascyn, CIO at Pimco, warned that an interventionist Fed could punish curve trades. Pimco remains underweight long bonds but has recently taken profits on shorter-term bets that worked well this year.

‍

This wouldn’t be the first time Washington pushed down long rates. During World War II, and again in the 1960s with “Operation Twist,” policymakers sought to hold long yields lower. The Fed also bought Treasuries and mortgage-backed securities during the 2008 financial crisis and massively expanded those efforts during the pandemic.

‍

“Congress has allowed the Fed to take these actions before,” said Gary Richardson, a Fed historian at UC Irvine. “But usually it’s been in wartime or crisis. Those conditions don’t apply today.”

‍

Critics warn that trying to suppress long rates when inflation is still running hot could backfire, as higher prices eat into real returns. In fact, expectations of more stimulus under Trump helped push 10-year yields as high as 4.8% earlier this year.

‍

A lingering question is what exactly “moderate long-term rates” means. By historical standards, today’s 10-year yield near 4% even January’s peak is below the 5.8% average since the early 1960s. Some argue that’s already “moderate,” undercutting the case for extraordinary policy moves.

‍

Mark Spindel of Potomac River Capital, co-author of The Myth of Independence, said the vague wording could justify almost any action. He has been buying short-term TIPS as insurance against the risk of a politicized Fed and higher inflation.

‍

The debate also ties into America’s ballooning fiscal picture. With national debt topping $37.4 trillion and deficits above 6% of GDP, lowering borrowing costs is increasingly attractive for policymakers.

‍

Bessent, following Janet Yellen’s playbook, has leaned on short-term bill issuance while limiting long-term bond sales, arguing that it makes little sense for taxpayers to lock in high borrowing costs.

‍

“The government can’t fix this on the fiscal side,” said Vineer Bhansali of LongTail Alpha. “So they’ll push on the Fed side. Manipulating long rates lower has become the only game in town.”

‍

For Bhansali, the inflation risk is real, but one the administration seems willing to accept. “Ultimately, the Fed will do what the president and fiscal authorities demand even if it means higher inflation.”

‍