Okay. Now, let’s take a deep breath, and I’ll try to explain what an inverted yield curve is and why I don’t think there’s any reason to freak out over it.
Here we go.
Under normal circumstances, an issuer’s longer-term debt carries higher interest rates than shorter-term debt does. That makes sense, because the longer-term loan is riskier. Your money is tied up for a longer period, you’ve got to worry about inflation chewing away the value of your principal and you also have to worry that interest rates might rise, which will decrease your security’s market value. But owners of short-term IOUs don’t have to worry about that stuff.
That’s why under normal circumstances, you have a rising yield curve — the longer the maturity, the higher the interest yield.
But that’s not the case these days with U.S. Treasury securities. Today, a 30-day Treasury IOU carries a higher rate (2.03 percent when last I looked) than a 10-year IOU (1.59 percent).
In the past, such an inversion has sometimes meant a recession is near. Sometimes it hasn’t. It’s just an indicator, one of many. It’s not infallible by any means.
There are all sorts of strange circumstances — including the fact that longer-term government securities issued by Japan and many creditworthy European countries carry negative interest rates — that help account for the sharp drop in longer-term U.S. Treasury rates. Hey, getting 1.59 percent on a 10-year Treasury is better than getting less than nothing on an equivalent Japanese or German security.
Although cutting the short rate to 1 percent as Trump demands would reverse the inversion, we’d be treating a symptom of possible economic disease rather than treating the disease.
Here’s why. I think — and I’m far from alone — interest rates aren’t a major reason U.S. economic growth seems to be slowing down. Rather, I think the major reason is something Trump sees every time he looks in a mirror: himself.
His trade and tariff wars, his alienating allies like Canada and Denmark while kissing up to leaders of enemies like Russia and North Korea and his unpredictable and destabilizing behavior have made lots of business leaders reluctant to make long-term investments and add employees in the United States.
In addition, swaths of our country — including many farmers — have become collateral economic damage because of Trump’s on-again, off-again, who-knows-what-he’ll-do-next trade and tariff negotiations with China. That hurts the economy, too.
Given that these things — rather than the shape of the yield curve — are the major cause of the problem, why on earth is Trump bullying the Fed to cut the federal funds rate (a short-term rate that’s the only rate it controls directly) by a percentage point?
The most charitable answer is that Trump really and truly believes the inverted yield curve is dangerous in and of itself. So that cutting short rates to 1 percent from 2 percent would eliminate the danger by eliminating the inversion.
However, I suspect his personal stake in having short-term rates drop sharply is a major, major influence on him. According to Bloomberg News, Trump’s company has about $340 million of variable-rate debt — which means a 1 percent drop would save him $3.4 million a year in interest costs.
(Sure, Trump’s loans aren’t tied to the federal funds rate. But the fed funds rate influences the benchmarks to which variable-rate commercial loans are typically tied.)
I offered both the White House and the Trump Organization a chance to comment, but neither got back to me.
One final thought: If low rates are a magical economic cure, why aren’t the economies of Germany and Japan — where interest rates on government debt are less than zero — booming? Could it be that ultralow interest rates are no more a cure-all there than they would be here?
Correction: In my previous column, I mangled my math. I said that if the market price of the 2.1 percent Austrian government bond due in 2117 rose about a dozen points, to 206 percent of face value, the bond would become a negative-yielder. Oops. The bond needs to sell for about 306 percent of face to be a negative-yielder. Sorry for the mistake.
Alice Crites contributed reporting to this column.