Extract from ABC News
Analysis
Despite Donald Trump's desire for lower interest rates, US bond yields are moving higher. (Reuters: Nathan Howard)
The silence has been deafening.
Perhaps it is partly because chaos has become the accepted norm, or maybe a view that the latest upheaval will come to naught.
While a handful of top-line American executives, such as banking chiefs JP Morgan's Jamie Dimon and former Goldman Sachs boss Lloyd Blankfein, expressed concern about the latest White House attack on US Federal Reserve chairman Jerome Powell, the vast bulk of US business chiefs remained silent.
No-one, it seems, is willing to put their head above the rampart and incur the wrath of the US president.
A great deal is at stake.
Shattering the independence of the world's biggest central bank might just be the tipping point for a calamity that many have predicted for more than a decade.
But even then, it could take years.
In the meantime, most American executives find the short-term appeal of lower interest rates attractive and are prepared to turn a blind eye to the long-term consequences.
Instant gratification versus self-control.
Jerome Powell, pictured touring the Federal Reserve renovations with Donald Trump in July, is facing a criminal investigation. (Reuters: Kent Nishimura)
Trump last week was expected to name Kevin Hassett, his top White House economic adviser, as his pick to replace Powell when the Fed boss steps down in May but, true to form, has opted to keep everyone guessing.
This week, he is reportedly heading to Davos to front the World Economic Forum, the annual gathering of globalists who for the past three decades have delighted in the removal of trade barriers and regulation, all while becoming incredibly rich along the way.
As an avowed nativist who espouses the virtues of protectionism, the irony of his presence won't be lost on other attendees. The US president has spent the past 12 months erecting trade barriers and arrives with threats of even higher tariffs.
Activists protest against Donald Trump ahead of the opening of the World Economic Forum in Davos, Switzerland. (Reuters: Denis Balibouse)
But he does have one thing in common with his audience. He's grown incredibly rich along the way.
Can Trump really manipulate rates lower?
There's a common misconception about how interest rates are set. Most of us believe the central bank — in our case, the Reserve Bank of Australia — sets the rate and we all just obey.
But it doesn't work quite like that. The interest rate is merely the price of money. And that price is determined by a market.
If there's a big lift in demand for money, the price goes up. If there's excess supply, the price drops.
Central banks are big and hugely powerful players in those markets. Most of the time, what they want to happen, does. But occasionally, they can be overpowered by the combined forces of other players.
Remember the RBA's plan to keep interest rates at rock bottom for three years during the pandemic?
Once inflation gathered pace, money markets went to war with the RBA and forced it into an embarrassing backdown, leaving hundreds of thousands of Australian households — who had bought property believing rates would be contained — feeling cheated.
The US Fed was caught out as well. After being dormant for three decades, Jerome Powell was caught flat-footed as inflation spiked and money markets forced the Fed to belatedly push rates higher.
Those lessons seem to have fallen on deaf ears in the White House.
The president seems to believe that whatever he decrees will happen. But already, there are signs his bold strategy to artificially lower rates could backfire.
Preparing for war
Despite military conflict waging on three continents and the threat of yet another Trump-led offensive on trade, international stock markets have mostly been, well, doing not much really, just blithely moving on.
Wall Street is sitting just below record levels and the local bourse has been recovering ground as global attention shifts to mining stocks and the soaring price of metals, particularly gold.
But there is a level of disquiet emerging on money markets and particularly in bonds. Stocks grab all the headlines, but it is bond markets that wield the power.
Right now, they're sending a message that they don't like what they see.
While the yields, or interest rates, on short-term debt are falling — with the prospect of enforced rate cuts — longer-term bonds are clocking interest rate increases.
That doesn't bode well for the US government, which is racking up huge amounts of debt just to repay the interest on the debt it already owes.
America has $US38 trillion ($56 trillion) in debt and is staring down the barrel of a $US1.7 trillion deficit this year.
Last week, the yield on US government 10-year bonds jumped to 4.24 per cent, the highest since September last year.
These bonds are the benchmark for global finance and help set global interest rates.
Normally, they move in lockstep with US Fed decisions.
But not now.
US market interest rates are moving higher. (Supplied: US Treasury/WolfStreet.com)
As the graph above indicates, US market interest rates are moving higher despite three rate cuts since September.
Why? Because investors are worried that the president's threat to strip the Fed of its independence and force rates to 1 per cent will result in another bout of inflation.
They're also concerned about the ever-expanding US debt pile.
As an illustration of the pace of growth in US debt, last week's auction of $US138 billion worth of 10-year US government bonds replaced just $US66 billion worth of debt that was maturing from a decade ago.
The bond market vigilantes are preparing for war. They took on Trump in April last year after his Liberation Day tariffs were announced and they won.
Within days, he was forced into a humiliating backdown and months of negotiations with other nations.
The great irony now is that Trump's attempt to artificially lower interest rates could cause the opposite: a spike in the price of money, forcing the US government to pay even higher interest bills on its debt, all while undermining the credibility of the US central bank and its role in global affairs.
Real intelligence required
As the centre of global finance, what happens with interest rates in the US affects everyone.
Our major banks all borrow from offshore. If American interest rates are lower than ours, as they often are, our banks and other big corporations are more likely to raise cash there and bring it home.
And because our banks are raising more cash offshore, they are soaking up less cash from local money markets and depositors, easing pressure on local markets.
Until fairly recently, Australian banks steered away from US-denominated debt as our interest rates dipped below America's. Instead, they concentrated on raising cash from local depositors with some cutthroat competition.
Lower rates on New York money markets tend to set a benchmark for the world. And when cash becomes more expensive, that too tends to transmit through the global system.
For the moment, that huge bubble in American technology stocks relies upon low interest rates. So the prospect of further cuts to US interest rates is hugely appealing.
US technology companies are spending like there's no tomorrow, hoping to hit the jackpot with artificial intelligence and data storage down the line.
But with share prices at nosebleed levels, the potential for an ugly stock market correction persists.
The catalyst is most likely to come from US bond markets unless, of course, cooler heads prevail.
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