Global Macro Research
Global Macro ResearchThinking through the Fed's "third mandate"
The Fed’s ‘third mandate’ – promoting “moderate long-term interest rates” – is gaining attention, raising the risk of mandate creep toward fiscal dominance. We outline three phases: an initial dovish tilt, markets pricing higher inflation tolerance, and eventual yield-curve control with financial repression. The latter would mean subordination of monetary policy to fiscal needs, risking unanchored inflation expectations, dollar weakness, and asset-price dislocations.
Authors
Luke Bartholomew
Deputy Chief Economist
Paul Diggle
Chief Economist
Duration: 1 Min
Date: Oct 01, 2025
Key Takeaways
- Stephen Miran and other Trump administration officials have recently invoked the Fed’s ‘third mandate’ of “moderate long-term interest rates.”
- A modest shift in the Fed’s reaction function toward lower rates doesn’t imply fiscal dominance, but mandate creep could evolve into a regime break.
- We identify three phases of fiscal dominance. In phase one, policy rates are cut more than they otherwise would be, boosting growth and risk assets. In phase two, markets question inflation tolerance, pushing expectations and term premia higher. But this rise in long-term yields undermines cheaper funding. In phase three, a politicised Fed does explicit yield-curve control (YCC) and financial repression to cap long-end yields.
- US YCC would be far more disruptive than the Fed’s QE or Japan’s YCC, which were deployed for monetary, not fiscal, objectives.
- A better historical analogy is the Fed’s use of yield caps during and after WWII, which kept rates low but saw inflation peak near 20%, before the 1951 Treasury-Fed Accord restored independence.
While fiscal dominance remains a low probability, the risk has risen – which could keep the dollar under pressure and gold supported as markets gauge how far a Trump-era Fed might go.
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