Speaking to the Financial Times this month, US Treasury Secretary Scott Bessent touted a half-point drop in US government borrowing costs over the 10 years since Donald Trump’s inauguration. “Where on earth is the market risk?” he asked, addressing critics of the government’s economic policies.
It is true that 10-year US Treasury yields have fallen more than those of other G7 countries in this particular period, but a greater truth is that the borrowing costs of the advanced economies have remained in sync for decades.
The US in 2025 is not an outlier. Instead, the only countries that have bucked broader trends relatively briefly over the past 35 years are Italy and Britain during the exchange rate mechanism crisis of 1992, Italy again in 1995 before it had the courage to join the euro, Italy for a third time during the eurozone crisis of early 2010, and Japan throughout the period when the country was mired in persistent deflation.
Synchronized movements in government borrowing costs have led economists to think global forces were responsible, with theories for the decline in long-term interest rates including population aging, excess Asian savings and secular stagnation.
However, in 2023 a remarkable paper by Sebastian Hillenbrand of Harvard Business School put the cat among the pigeons when he showed that movements in US long-term interest rates could not be separated from the Federal Reserve.
Central banks are supposed to respond to broader trends in the economy, but his paper showed the opposite was true. As the chart below shows, the entire long-term decline in 10-year U.S. Treasury yields between 1989 and 2021 occurred in the three days surrounding the Federal Open Market Committee meetings. At other times, there was no long-term decline in rates at all. The chance of this happening by chance is very close to zero.
Hillenbrand thought the Fed was probably acting as a conduit for broader information. But markets only absorbed information about trends when they were confirmed by the central bank around meeting dates. The Fed therefore issued “long-term guidance.”
This was quite problematic for the central banks as it was as if they were in a hall of mirrors. Although they controlled the price of money overnight, they liked to use market prices to obtain information about appropriate longer-term interest levels. It can be assumed that these are an indication of the neutral nominal interest rate, which neither restricts nor stimulates the economy. If what they saw in the markets was merely a reflection of their own policies and statements, the entire argument would become circular.
But like many remarkable statistical regularities, the relationship began to unravel just as Hillenbrand’s results attracted attention.
I updated Hillenbrand’s graph. The Fed’s influence on 10-year U.S. Treasury yields ended in 2022. Since then, yields have continued to fall in the three days surrounding the FOMC meetings, but have risen 4 percentage points at other times.
The markets are no longer following the Fed’s guidance on low long-term interest rates. Instead, they have priced in significant term premiums, which represent their demand for higher returns from holding long-term government bonds. This is in stark contrast to the Fed: policymakers have not yet followed the markets in thinking that the longer-term interest rate trend is significantly higher.
What about other countries?
A nice piece of analysis from the Swedish Riksbank replicated Hillenbrand’s analysis for a number of other countries. It showed that roughly half of the decline in long-term borrowing costs in other countries also occurred around FOMC meetings, pointing to the Fed’s influence. Much more of the decline in yields occurred around the FOMC meetings than around the policy meetings of the individual country’s central bank, the study found.
I have replicated the Riksbank’s research for the G7 and updated it in the chart below.
But there’s a problem. If you look at the G7 data, you’ll see that many more changes in 10-year yields occurred outside the Fed meeting window. The influence of the US central bank is therefore not as great as it seems on the Riksbank graph.
You can click on the graph to view every G7 country except the US.
The trend in global government’s long-term financing costs has been similar across countries. But the Fed’s influence has never been great and has diminished significantly.
This is good news. The financial markets are not meant to be sheep waiting for pronouncements from the all-powerful Fed. They must take their own view of long-term global and domestic trends and set prices accordingly. That in turn helps inform central banks what those outside their institutions believe, without simply repeating their own positions.
The Fed’s declining influence, both domestically and globally, is a blessing.
What I’ve read and watched
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Wow. You want to see Fed Chairman hopeful Kevin Warsh speak to Fox News. Trump’s policies are driving “stronger growth and lower prices,” while the Fed’s actions have “led to stagflation.” The thing to take away from this interview The point is not the glaring contradictions in Warsh’s prescriptions, but the fact that he really wants to be the new management he believes the Fed needs.
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According to some US data from the government shutdown, CPI inflation was better than expected.
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No, Ronald Reagan didn’t like tariffs, Mr. President.
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In a bold and important forecast, the IMF thinks US gross national debt as a percentage of GDP will exceed that of Greece and Italy before the end of the decade.
One last graph
Markets now give a 60 percent chance that rates will fall at the December meeting, and a 40 percent chance of two rate cuts in February. These moves are much closer to those of the FT Monetary policy radar viewwhich has long been the case that British disinflation was postponed, not destroyed.
