The Fed’s rate lever is breaking as bond markets stop following its lead
The Fed’s traditional rate tool is losing force. Short-term policy rates still move, but long-term borrowing costs are now driven more by Treasury supply, inflation expectations, and doubts about U.S. fiscal sustainability. Massive post-pandemic borrowing, $37.6 trillion in federal debt, and trillions in annual refinancing have kept the 10-year Treasury yield high even as the Fed cut rates in 2024–2025. That has left mortgage rates around 6.8%–7.1% and worsened housing affordability. Elevated yields also raise the government’s refinancing costs, pushing interest spending higher and reinforcing deficit concerns. At the same time, the Fed has stopped balance-sheet runoff and restarted Treasury bill purchases to keep markets liquid, suggesting routine structural support is increasingly necessary. For risk assets like Bitcoin, tighter real yields and Treasury competition for capital have reduced the benefit of expected Fed easing.
