Steven Blitz, chief U.S. economist at TSLombard, argues that current U.S. policy constraints go beyond simply whether to raise rates again in September. Expanding fiscal deficits and interest payments are making it increasingly costly for short-term interest rates to rise significantly; simultaneously, long-term Treasury bonds face pressure from fiscal financing and rising term premiums. Therefore, the Treasury and the Federal Reserve effectively need to address both short-term financing costs and long-term yields simultaneously. The current approach involves the Treasury reducing long-term supply, the Federal Reserve maintaining policy rate stability, and shifting some maturing balance sheet funds to short-term debt, thus helping the government rely more on short-term financing. However, a longer-term dilemma lies in the inability to raise short-term rates indefinitely, while long-term rates cannot be artificially suppressed indefinitely. Allowing a steeper yield curve and rising term premiums would suppress stock valuations and capital expenditures; continuing to prioritize growth could ultimately lead to higher inflation and a weaker dollar.
