The Trump administration is pushing "moderate long-term interest rates" to the core of monetary policy by citing a long-overlooked clause in the Federal Reserve's charter, potentially overturning decades of investment rules followed by Wall Street.

The latest signal of this development comes from Milan, Trump's nominee for Fed Board of Governors. During congressional hearings, he referenced the Fed charter's clause on "pursuing moderate long-term interest rates," sparking widespread discussion among bond traders.

Previously, the market widely believed the Fed only had a "dual mandate" of "price stability" and "maximum employment." This statement not only made markets aware of a little-known "third mandate" in the Fed charter, but is also viewed as a clear signal that the Trump administration is attempting to use the Fed's own regulations to provide "legitimacy" for intervening in long-term bond markets.

Although markets are currently expecting Fed rate cuts due to weakening labor markets, causing long-term yields to decline, Washington's focus on long-term rates has been sufficient to raise alarm among market participants and force them to incorporate this potential policy shift into their investment considerations.

**"Third Mandate" Emerges**

The Trump administration's reshaping of the Fed is accelerating, and the aforementioned statement is a crucial step in this process.

According to a September 5th report by Andrew Brenner, Vice Chairman of Natalliance Securities LLC, the Trump administration "found this somewhat vaguely defined clause in the Fed's original documents that allows the Fed to have greater influence over long-term rates."

He emphasized that while this isn't a current trading theme, it's definitely an issue investors need to contemplate. This development also highlights Trump's determination to break decades of institutional norms to serve his own objectives and weaken the Fed's long-standing independence.

Washington's attention to long-term rates isn't without reason. In the economy, long-term Treasury yields largely determine the cost of trillions of dollars in debt including mortgages and commercial loans. Treasury Secretary Bessent has also cited the Fed's three statutory objectives in a column, similar to Milan, and criticized the Fed's "mission drift." Lisa Hornby, Head of U.S. Fixed Income at Schroders, stated in an interview that stimulating the housing market is "clearly a top priority for this administration."

**Potential Policy Tools and Market Reactions**

What measures the Trump administration and Fed might adopt to control long-term rates has become a hot topic of market discussion. Analysts are exploring various possibilities and adjusting their investment strategies accordingly.

George Catrambone, Head of Fixed Income Americas at DWS, believes that if long-term yields remain elevated after consecutive Fed rate cuts, it could become a trigger for policy action. He believes that whether led by the Treasury or supported by the Fed, they will ultimately "achieve their goals in some way." Catrambone said he has been converting maturing short-term Treasuries into 10-year, 20-year, and 30-year bonds in recent months, which is a "non-consensus" position.

Possible policy options include: the Treasury selling more short-term bills while buying back longer-term bonds. More aggressive measures might involve the Fed purchasing bonds through quantitative easing (QE), although Bessent has written against past QE while supporting QE activation in "true emergencies." Another option is Treasury cooperation with the Fed, using its balance sheet to absorb longer-term bond issuances.

Daniel Ivascyn, Chief Investment Officer at Pacific Investment Management Company (PIMCO), noted that while currently unlikely, if the ultimate buyer—the Fed—decides to enter the market to set interest rate caps, the risk of shorting long-term bonds would increase. PIMCO currently remains underweight long-term debt but has begun taking profits on positions designed to benefit from outperforming short-term securities.

**Historical Precedents and Inflation Risks**

Historically, the Fed has intervened in long-term rates multiple times, most famously during and after World War II, and the early 1960s "Operation Twist." During recent global financial crises and the COVID pandemic, the Fed also used large-scale asset purchases to suppress long-term yields.

However, Gary Richardson, economics professor at UC Irvine and Fed historian, points out that past actions mainly occurred during wartime or economic depression:

"Those justifications don't apply now. We're not fighting a major war, nor are we in a great depression. Now, it's more like Trump wants to do this."

Markets also remain vigilant about potential negative impacts of such intervention, especially inflation risks. Institutions like Carlyle Group warn that Fed and Treasury attempts to suppress long-term rates while inflation remains above target levels could backfire. In January this year, market expectations that the Trump administration would boost economic growth through more stimulus measures once pushed 10-year Treasury yields to an annual high of 4.8%.

**Defining "Moderate" and Sovereign Debt Costs**

The Fed charter's expression of "moderate long-term interest rates" itself carries enormous ambiguity. Mark Spindel, Chief Investment Officer at Potomac River Capital, believes this term's vagueness can be used to "justify almost anything."

He notes that by historical standards, current 10-year Treasury yields around 4% are far below the 5.8% average since the early 1960s, seemingly indicating no need for unconventional policies. Spindel is purchasing short-term Treasury Inflation-Protected Securities (TIPS) to hedge against risks of Fed independence loss.

Vineer Bhansali, founder of asset management firm LongTail Alpha, connects this move to America's expanding national debt. With Congress passing the latest budget extending Trump's tax cuts, U.S. budget deficits are expected to remain at elevated levels above 6% of GDP. As of September 9th, total U.S. national debt reached $37.4 trillion. Lower rates would help reduce financing costs for this massive debt.

Bhansali believes that since the government cannot solve debt problems at the fiscal level, "they must solve it at the Fed level, because that's the only option. Therefore, Treasury Secretary manipulation of long-term rates is expected." He stated that the Trump administration seems willing to accept higher inflation risks, while "the Fed will ultimately have to comply with presidential and fiscal authority wishes, even if inflation rises."