Janet Yellen’s Short-Term Thinking Could Cost the U.S. Big
Janet Yellen gets low marks from most financial experts for her term as Treasury Secretary. The Treasury Secretary’s primary role is managing U.S. debt issuance, determining the mix of loan terms and debt structures to minimize interest costs. During the pandemic, interest rates were very low—below 1 percent in most instances—and instead of locking in those low rates for 10 or 30 years, she chose to mostly issue debt in short maturities, usually two years and under.
When interest rates inevitably rose in 2022, the U.S. government was forced to refinance at significantly higher rates, which cost taxpayers hundreds of billions of dollars. It was an error of judgment that most of us cannot even comprehend—if interest rates are close to zero, you lock them in for as long as possible. It’s no different than refinancing your mortgage at 2.5 percent, as millions of homeowners did during that time period. It’s common sense.
Why did Yellen fail to do this? Part of it could have been bad forecasting—perhaps she thought that rates would remain low indefinitely, so there was no particular urgency in terming out the debt. She may have believed she was actually saving money by issuing debt in T-bills and 2-year notes instead of long-term bonds because the interest rates on longer maturities were about half a percent higher. Or, perhaps she couldn’t do the hard thing politically—if she had termed out the debt to 10-year notes and 30-year bonds, it would have caused long-term interest rates—and by extension, interest rates on mortgages—to rise slightly, and she couldn’t bear the political risk. Now, incoming Treasury Secretary Scott Bessent (who is almost certain to be confirmed) will be faced with the prospect of terming out the debt to longer maturities in the event that rates rise even higher than they are currently.
This will be painful. The United States finances itself through debt auctions. As Bessent sells more bonds at 10-, 20-, and 30-year maturities, the increased supply of bonds will cause long-term interest rates to rise, which will mean that we will all be paying higher interest rates on mortgages and other long-term borrowings. But the failu
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