INVESTING
The Fed’ s Long-Term Dilemma
The U. S. Federal Reserve can bring down short-term interest rates, but longer-duration bonds reflect larger fiscal and economic trends.
6 %
4
2
— 10-year bond— Federal funds rate— Three-month bill
0 |
|
l |
l |
l |
l |
l |
|
|
2016 |
2018 |
2020 |
2022 |
2024 |
Source: US Federal Reserve
The Fed could begin large debt purchases again, despite the dismal record of so-called quantitative easing, while the Treasury could use regulations to essentially force banks to buy more debt, part of a strategy called financial repression that has an equally bad reputation.
The Fed’ s Long-Term Dilemma The U. S. Federal Reserve can bring down short-term interest rates, but longer-duration bonds reflect larger fiscal and economic trends.
But not always. Longer-term interest rates reflect more than future expected short-term rates. This is why the market for bonds of different durations is segmented. The Fed’ s influence is greatest on any bonds of less than five years duration; as bonds get longer-term, it has less influence. Longer-term bonds are more affected by market forces. Their yields reflect expected future inflation, inflation risk and a risk premium for holding an asset with more price variability than a shortterm bond.
Lately, all these factors are keeping rates high. Inflation appears to be holding steady at 3 %, yet the Fed has already started easing by cutting rates and ending quantitative tightening. There is anxiety about inflation staying high because the full impact of tariffs has yet to be felt, and the Fed has not indicated( short of some wish-casting in its summary of economic projections) that it is committed to bringing inflation down further. There is even less commitment in Congress to reducing the debt, which means more bonds will be issued in the future, which means a drop in bond prices. This makes holding longer-term bonds riskier, and investors want a bigger premium to compensate for that.
It all adds up to upward pressure on long-duration bond yields— no matter what the Fed does with short-term rates.
Even if the Fed found religion on inflation and Congress suddenly cared about the debt, there would still be reason to expect long-term bonds to be higher. Historically, bond yields revert to the mean: Unlike stocks, they rise and fall around a long-term average that is higher than it was in the 2010s. Over time, the 10- year yield has declined simply because the world got less risky and sovereign defaults became less common.
But that long-term average still exists. The reason is that, current macro factors aside, long-term yields reflect things that don’ t change much over time, such as how productive capital is and how much society values the future compared to the present. Economists have also long thought an aging population would bring down yields because older societies are less productive and buy more debt, but we are less sure of this than we used to be.
A stubbornly high 10-year rate will no doubt frustrate many politicians, not to mention central bankers. It means mortgage rates won’ t go down, makes servicing the national debt more expensive, and raises the likelihood of a“ credit event” as firms’ debt comes due and they can’ t afford to refinance. Alternatively, the economy might just slow down, exposing the ineffectiveness of the Fed’ s monetary policy.
So expect the government to try to do more to lower longer-term rates. The Fed could begin large debt purchases again, despite the dismal record of so-called quantitative easing, while the Treasury could use regulations to essentially force banks to buy more debt, part of a strategy called financial repression that has an equally bad reputation. They should be wary. Messing with the price of risk— which is what bonds represent— tends to create more problems than it solves.
ALLISON SCHRAGER is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.
34 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2026 WWW. FA-MAG. COM