Economics Update September 2026 - The U.S. government's manipulation of interest rates fuels new doubts about the Fed's independence

Even under President Donald Trump, there is no “free lunch” in economic policy—a lesson Treasury Secretary Scott Bessent will have to learn. Concerns about interest rate trends had recently been growing within the Treasury Department, and these concerns are justified: This year, approximately 3.8 percent of total economic output will have to be spent on interest payments on the high national debt. Ten years ago, that figure was less than 2 percent, and based on interest rates as of early March, it is projected to rise to just under 6 percent over the next ten years. However, based on current interest rates, it will be nearly one percentage point higher. Total public debt will rise to 159 percent of GDP by 2036. Even at the previous interest rate level, it would have been an alarming 154 percent.

No wonder, then, that Finance Minister Bessent is striving to limit a further rise in interest rates. This goal was already the primary motivation behind the joint action with the Bank of Japan to prop up the yen. Now, Bessent has announced plans to repurchase long-term government bonds, financing the purchases either by issuing short-term T-bills or through an account at the country’s central bank. The measure is initially serving its purpose: Current interest rates on 10- and 30-year government bonds are about 10 basis points below the level seen at the end of July. In the longer term, however, the effect is likely to remain limited, as the underlying problem—the unsustainable state of public finances—is by no means being resolved. So far, there is no sign of a serious commitment to reversing this trend, that is, to curbing spending.

Is the Fed's independence up for debate again?

However, this intervention now creates an inherent conflict of objectives with the Fed: For more than five years, the Fed has failed to meet its goal of keeping the inflation rate at 2 percent. The Fed’s decision-making body had recently sent clear signals that it would focus more closely on this problem and aim to bring the inflation trend back down to 2 percent. Uncertainty over whether Fed Governor Kevin Warsh supports this course likely diminished after his speech in Jackson Hole, but has not completely disappeared. Uncertainty about the Fed’s course caused confusion following the July meeting and drove interest rates higher. In the view of market participants, at least two interest rate hikes will be necessary to achieve the target in the foreseeable future. That may not be enough, meaning the Fed may have to continue its rate-hiking cycle. In any case, rising interest rates at the short end of the yield curve are likely to be problematic from the Ministry of Finance’s perspective, because the impact of higher interest rates on total liabilities is felt quickly due to frequent refinancing needs, thereby further worsening the state of public finances. The foreseeable consequence would be a further rise in long-term interest rates, as investors would demand a higher risk premium.

It remains to be seen whether and when this conflict between the Treasury and the Fed will escalate, and how it will be resolved. This could spark a new round of debate over the Fed’s independence. As a sign of waning confidence in the integrity of U.S. policy in general—and fiscal policy in particular—the U.S. dollar is losing value.