WSJ: Trump’s moves that pushed interest rates and inflation higher

The Trump administration’s initial theory that signaling deficit seriousness to the bond market would lower long-term interest rates did not work — inflation is rising, the Federal Reserve is raising rates, and the 10-year Treasury yield hit its highest level since 2007 last week, as The Wall Street Journal analyzes.

The yield touched 5.23% intraday on Friday, settling around 5.2%, while mortgage rates crossed 7%, up from 6% in February — a gap that adds about $3,000 a year to the payments on a new $400,000 loan.

Workers’ wages have not kept pace with inflation since March. US government interest payments on the debt crossed $1 trillion for the fiscal year ending this week — more than spending on the military — while the deficit stands near 6% of gross domestic product.

As causes, the WSJ lists the tariffs that raised the cost of imported goods, the war with Iran that drove up oil and diesel prices, immigration restrictions that shrank the workforce, as well as tax cuts, new spending and pressure on the Fed to cut rates.

“This was entirely predictable,” said Jessica Riedl, a former Republican Senate aide and now a fellow at the Brookings Institution, adding that six of the administration’s policies “move inflation up, not down.”

Treasury Secretary Scott Bessent said last week on Fox News that without the war, inflation would have returned to the Fed’s 2% target; in August, the core consumer price index posted its slowest 12-month increase in five years. White House spokesman Kush Desai defended Trump’s economic agenda, while over the weekend Trump complained on Truth Social that the economy’s strength was not being recognized.

Bessent made the “3-3-3” agenda central: a 3% of GDP deficit, 3% real growth and 3 million extra barrels of daily energy production. The balance after 20 months is mixed: the deficit for the fiscal year ending September 30 will be at least double his target.

The Fed raised rates this month for the first time since 2023, under new chairman Kevin Warsh, who replaced Jerome Powell this spring. Republican Senator John Kennedy of Louisiana called the situation “a losing battle.”

Meanwhile, Trump promised this month $5,000 to every American adult if Republicans keep the House and Senate in the fall elections — a promise that Joseph Lavorgna, a former Bessent adviser and now chief economist at SMBC Americas, described as a sign that seriousness about fiscal consolidation is in doubt.