In the early days of President Trump's second term, his economic advisers laid out a simple theory: Show the bond market that Washington was serious about closing its gaping deficits, and long-term interest rates would fall on their own. Trump could leave the Federal Reserve alone.
It hasn't worked out that way.
Inflation is rising, the Fed is raising rates and the 10-year Treasury yield is well above where it stood on Inauguration Day, when the new team blamed high rates on runaway Biden-era spending. Last week, that yield reached the highest level since 2007 as investors weighed a resilient economy, prolonged energy disruptions that threaten to aggravate price pressures and a central bank losing patience waiting for them to fade.
The White House theory rested on fiscal restraint that never arrived and overlooked how much of Trump's own agenda would feed the price pressures now pushing rates higher. Tariffs raised the cost of imported goods. The war with Iran sent oil and diesel prices soaring. Immigration restrictions shrank the labor force.
"This was entirely predictable," said Jessica Riedl, a former Republican Senate aide who is now a budget and tax fellow at the Brookings Institution. Add tax cuts, new spending and pressure on the Fed to lower interest rates, and "all six of those policies move inflation up, not down," she said.
The stakes are high.
Rising long-term rates raise borrowing costs for home buyers, businesses and the government. Mortgage rates, which dipped to 6% in February, now sit above 7%, a difference that adds roughly $3,000 a year in payments on a new $400,000 loan. Workers' pay hasn't kept pace with inflation since March.
The government's interest payments on its debt topped $1 trillion for the fiscal year that ends this week, more than it spends on the military. That leaves less room to respond if the economy stumbles. And if inflation doesn't cool, the Fed may have to slow the economy-and hiring-to bring it down.
The economy has been resilient. Unemployment is near 4%, consumers are spending, and growth has been solid. But that strength is part of the problem.
When demand is sturdy, businesses can more easily pass higher fuel costs on to customers, and workers can press for raises to keep up. That makes it more likely that an energy shock spreads into broader inflation, giving the Fed more reason to raise rates and investors more reason to demand higher yields.
Some of the pressure is outside Trump's control. The AI building boom, which the White House has cheered, is driving up the cost of chips, electrical components and power equipment. It is also competing with the U.S. government for borrowed money.
That competition would matter less if Washington's borrowing demands weren't also rising. Deficits are running near 6% of gross domestic product, close to the Biden-era levels that Treasury Secretary Scott Bessent last year called the highest ever for a peacetime economy that wasn't in recession.
Inside the White House, some aides are frustrated that the war has overshadowed the momentum they say the economy carried into this year, people familiar with the matter said.
Officials have pointed to a construction boom laying the groundwork for the manufacturing revival Trump promised. They acknowledge that high energy prices have stalled that progress and are squeezing family budgets.
If not for the war, "the inflation numbers would be very different," with inflation likely back at the Fed's 2% goal, Bessent said on Fox News last week. In August, the core consumer-price index, which excludes food and energy prices, posted its slowest 12-month growth in five years.
"President Trump's long-term economic agenda is yielding results in a historic and durable way for everyday Americans," said White House spokesman Kush Desai.
Over the weekend, the president complained he isn't getting enough credit for the strength of the economy. "Business is growing. Americans are earning more money than ever before. Poverty is at its all-time lowest level, and exports are surging!" he wrote on Truth Social.
Slaying the deficit
Bessent made deficit reduction a centerpiece of his pitch during the 2024 campaign. Then a hedge-fund manager advising Trump, he championed an agenda called 3-3-3: cutting the deficit to 3% of GDP, lift inflation-adjusted growth to 3% and increase domestic energy production by the equivalent of 3 million barrels of oil a day.
Once Trump took office, advisers trotted out a series of fixes for the deficit.
First came the Department of Government Efficiency, which Elon Musk said could find $2 trillion in savings by eliminating wasteful spending. It delivered very little. Then came tariffs, which brought in record customs revenue until the Supreme Court ruled this year that Trump lacked the authority to impose many of them.
Now the message is that strong economic growth will generate the revenues needed to reduce deficits. "We can grow our way out," Bessent said during a television interview on Aug. 20.
Growth hasn't done much so far.
"Given the performance of the U.S. economy this year, there's every reason to have expected the budget deficit to go down, and the budget deficit's not going down," said Bruce Kasman, chief economist at JPMorgan Chase, earlier this month. He noted that was playing some role in pushing up long-term yields.
Bessent, in the August interview, defended his surprise decision to at least double the Treasury's purchases of long-term bonds after the 30-year yield hit its highest level since 2007. He said the move was justified because yields had run ahead of the economy's fundamentals.
Buying back older bonds shrinks the supply of long-term debt in the market, which can push yields down. Investors read the move as an effort to contain the government's borrowing costs. Yields fell briefly but then climbed within a day.
The buybacks reflect the limits of Bessent's position.
He's using "tactical tools to try to defy markets because he doesn't have his hands on the fundamental levers, such as deficit spending and tariffs," said Robert Zoellick, a former World Bank president who served as a senior trade and diplomatic official under President George W. Bush.
Sen. John Kennedy (R., La.) was more blunt. "It's a losing battle," he told reporters earlier this month. "I understand why the secretary did what he did, but it's not going to work."
The gambit is a risk to Bessent's standing on Wall Street, where as a trader for George Soros, he was part of the team that successfully wagered against the British pound in 1992.
"Markets want to believe that someone advising the president is an adult who at least understands the problems, even if he or she has limited ability to address them right now," Zoellick said.
Bessent also said last month that a deficit-reduction plan would be unveiled within days, though he later said it wouldn't be released for weeks or months. Trump, meanwhile, pledged this month $5,000 for every adult if Republicans keep control of the House and Senate in this fall's election.
"If the president was even raising the possibility of giving out this money, then how serious could he possibly be on fiscal consolidation?" said Joseph Lavorgna, a former counselor to Bessent who is now chief economist at SMBC Americas.
Pierre Yared, who served as acting chairman of the White House Council of Economic Advisers until July, said the affordability problems frustrating voters reflect years of cumulative price increases and a housing shortage that can't be fixed quickly. Deregulation can lower costs across the economy and help production respond faster to shocks such as the recent jump in energy prices, he said.
Twenty months in, the 3-3-3 scorecard is mixed. Energy output has risen and growth has been solid, but the deficit is set to rise for the fiscal year ending Sept. 30 to a level that is at least twice Bessent's target. It declined slightly during Trump's first year back in office, owing in part to a one-time change in student-loan accounting.
"If Bessent were president, I believe that he would try to get the deficit down to 3% of GDP, but he's not the president. Donald Trump never made it a priority," said Andy Laperriere, head of U.S. policy research at Piper Sandler and a former House GOP adviser.
'Look in the mirror'
The deficit doesn't rank high among Trump's priorities, if it registers at all, advisers said. These people say his main preoccupation has been Fed rate cuts, which he saw as a shortcut to shrinking the government's interest bill.
Within weeks of his return, Trump was again pressing then-Fed Chair Jerome Powell to drop rates, as he had in his first term. His advisers piled on, accusing the Fed of playing politics.
Through the summer of 2025, Fed officials cited concerns that tariffs might stoke new price pressures after a punishing three-year fight against rising prices appeared to be paying off. The Fed ultimately lowered rates three times late last year, citing signs of a weakening labor market and a judgment that tariff-driven price pressures would prove short-lived.
This spring, Trump replac e d Powell with Kevin Warsh, who he expected would deliver lower rates.
This month, Warsh's Fed raised rates for the first time since 2023.
The Iran war and an economy running on the AI boom drove that decision. The Fed spent much of the year anticipating that energy price increases from snarled shipping corridors in the Middle East would subside quickly. When that didn't happen, "you have to look in the mirror and say, 'Inflation looks like it's been here for a while, so maybe we should do something about it,'" Richmond Fed President Tom Barkin said last week.
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