Kathmandu— The recent rise in long-term US Treasury yields has sparked discussions about fiscal irresponsibility, but experts argue that these higher yields reflect deliberate monetary policies rather than market reactions to excessive government borrowing. According to analysts like James K. Galbraith, the policy choices behind rising bond yields have significant distributional consequences, enriching wealthy bondholders while squeezing workers and borrowers.

Monetary Policy Influence

The Federal Reserve (Fed) directly sets short-term interest rates and influences long-term yields through its balance sheet operations. The current rise in long-term rates is driven by concerns about inflation, which remains above the Fed’s 2 percent target. However, these fears are exaggerated as moderate inflation does not necessarily indicate an inflationary crisis. The deeper issue lies with the Fed's commitment to a low inflation target, leading to unnecessarily high short-term rates and expectations of future rate hikes.

Quantitative Easing Impact

The post-2008 period saw quantitative easing (QE) reduce long-term yields by having the Fed purchase large quantities of Treasury securities. As QE policies have retreated, this source of downward pressure on yields has diminished. Despite current yields appearing high relative to recent history, they remain modest by longer historical standards and do not indicate financial unsustainability for US public debt.

Distributional Consequences

James K. Galbraith argues that higher interest rates have different effects when federal debt is large. They generate substantial interest payments to government bondholders, enriching the wealthy while squeezing housing, business investment, and consumer credit. The policy regime has chosen to tolerate these higher rates, reversing a period of low returns for safe financial assets.

Political Implications

The conventional interpretation of rising yields as evidence of fiscal irresponsibility is misleading. Instead, the higher interest payments are a result of policy decisions that transfer income toward creditors. This regime can lead to austerity measures, justified by citing higher government interest bills as proof of out-of-control deficits.

(With inputs from Jacobin)

Originally published on abcnews.com.np.