Trump & Bessent Versus Powell & The Bond Vigilantes
What this covers
Ed Yardeni argues that the US economy has reached a state of near-perfect equilibrium—what he calls "nirvana"—with unemployment at 4.1%, inflation hovering near 2%, and no recession on the horizon. Against this backdrop, he examines the Trump administration's strategy to lower government borrowing costs, which hinges on two mechanisms: replacing Federal Reserve Chair Powell with a rate-cutting loyalist by February, and shifting Treasury financing toward short-term bills to suppress long-term yields through what Yardeni terms "yield curve control" (YCC-T). The central tension of the discussion is whether this approach represents clever debt management or a recipe for market turmoil, played out against the much-publicized threat of "bond vigilantes" punishing the US for fiscal excess.
Yardeni's core claim is that the bond vigilante risk is substantially overstated. True Treasury bonds comprise only about $5 trillion of the $27 trillion national debt; the remainder consists of bills and notes. Against roughly $300 trillion in global debt, this supply is easily absorbed by international demand, making a Treasury crisis unlikely. More provocatively, he argues that Trump's entire strategy rests on a flawed assumption: that installing a loyalist Fed chair and cutting rates will lower long-term bond yields. When the Fed cut 100 basis points in late 2023 and 2024, long yields did not follow, suggesting the link is broken. Treasury Secretary Bessent, Yardeni notes, is now repeating tactics he once criticized Janet Yellen for employing. The discussion also touches on secondary themes—the resilience of the economy despite tariff announcements, artificial intelligence as an evolutionary rather than revolutionary force, baby-boomer wealth as an economic cushion, and housing affordability as a genuine hardship for working families—before concluding that the administration should consolidate its gains and avoid new disruptions ahead of the midterms.
Aronson argues the US economy is in a 'soft patch' near full-mandate 'nirvana' with no recession imminent, the Fed should hold rates steady rather than cut, and the much-feared bond vigilante risk on Treasuries is overstated because actual long-bond supply is small.
- Inflation near 2% and unemployment at 4.1% mean rates are already where they should be
- Only ~$5 trillion of true Treasury bonds exist versus ~$300 trillion global debt, so demand for 10-year Treasuries is ample
- Trump's plan to finance short-term and install a loyalist Fed chair may not actually lower bond yields
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The Treasury's plan to fund needs heavily in short-term bills is best described not as 'Treasury QE' but as yield curve control (YCC-T), i.e. Treasury yield curve control.
“I've I I labeled it not as Treasury QE, but as uh, yield curve control YC-T. In other words, treasury yield curve of control.”
The bond vigilante threat to long-term Treasuries is exaggerated because actual Treasury bonds total only about $5 trillion of the ~$27 trillion debt (the rest being bills and notes), and global demand can easily absorb $5 trillion of 10-year Treasuries against ~$300 trillion of total debt.
“the amount of Treasury bonds outstanding isn't $27 trillion... Treasury bonds are $5 trillion of that... surely under any circumstance I would imagine that there's $5 trillion of demand in the world for US 10year treasuries”
Trump's debt-financing game plan is to issue everything short-term in T-bills, then install a loyalist Fed chair by February who can persuade the FOMC to cut rates—but the key flawed assumption is that lowering the Fed funds rate will lower the bond yield, which did not happen when the Fed cut 100 basis points in late 2023/2024.
“in Trump's game plan, he finances everything short-term that he needs to gets Fed chair to his liking... And then the other key assumption here is lowering the Fed funds rate will lower the bond deal, which well, hey, not so fast. That might not happen. It didn't happen when the Fed lowered interest rates in late 2023.”
Treasury Secretary Bessant is now playing the same 'gimmicky' game—issuing more T-bills to suppress yields—that he criticized Janet Yellen for in November when her quarterly refunding shifted financing toward bills, which rallied the bond market.
“Bessant, as you know, was uh initially oppo opposed to what Janet Yalen did... they were going to do it in bills and so the bond market rallied significantly on that... now that he's treasury secretary that's exactly the gimmick he's playing”
Analysts are poor predictors of recessions because they typically wait until the companies they follow tell them a recession has arrived, rather than anticipating it.
“analysts are not particularly good at giving us a indication of a recession coming. Uh they typically wait until the companies that they uh follow tell them that we're in a recession”
When the Fed is doing QE it effectively controls the 10-year yield, but when it is not, the market controls the 10-year rate.
“the if when the Fed was doing QE, they pretty much controlled the the the tenure. Uh but I I say now that they're not doing QE, I'd say that the market control controls it.”
Baby boomers' $80 trillion net worth will keep the economy moving forward through spending on healthcare, leisure, and entertainment, outweighing the drag from roughly $1 trillion of student loan debt now coming due.
“the net worth of the baby boomers is $80 trillion. So... I would still bet that the baby boomers keep the economy uh moving forward spending on healthcare, on leisure and entertainment”
AI is artificial but not truly intelligent—a probability model prone to hallucinations that reasons poorly—so it cannot replace knowledge work because its outputs must be read and double-checked by a human anyway, making it evolutionary rather than revolutionary.
“it's a it's a probability model... you can't just use artificial intelligence and assume that it's intelligent and whatever it gives you is correct. You do unfortunately have to spend some time uh reading its results and then double-checking it.”
Whoever Trump nominates as Fed chair will be viewed by markets as corrupted, non-independent loyalist, and even Bessant has noted that rate decisions are made by a committee, implying a loyalist chair could be outvoted or be one of only a few dissenters.
“everybody would view uh whoever he nominates as Fed chair as kind of corrupted uh not independent uh a loyalist... Bessant... did remind us in a quote a couple of days ago that interest rate decisions are made by a committee”
June payrolls rose 147,000 (better than expected) but the workweek fell and average hourly earnings rose only 0.2%, so real wages barely rose, leaving the labor market in a 'soft patch' rather than booming, with the earned-income proxy up about 2.3%.
“payrolls were up 147,000... the work week was actually down a bit and uh the average hourly earnings increased by a pedalling 0.2%... So, real wages barely went up if if at all... maybe we're up 2.3.”
Tariffs imposed on steel, aluminum, copper, and autos have so far produced almost no inflation, with the Cleveland Fed nowcast showing roughly 0% to 0.07% headline CPI for June/July and core under 2% once rent is excluded.
“if you go to uh the Cleveland Fed's uh inflation now casting... they're looking for a July number uh for the CPI for the headline of uh plus 0.07%... there's no sign really that the tariffs that Trump has imposed on steel, aluminum, copper... has had much in the way of an inflation”
The stock market's recovery was driven not only by tariff relief but by reversal of the 'DeepSeek effect,' which had made investors fear that cheaper AI models would render high-end Nvidia chip spending unnecessary and create a data-center glut.
“it's also been been the deepseek effect where people got very nervous in late January when deepseek announced that they had created a large language model with the cheaper versions of um uh Nvidia chips”
There will likely be no recession for the rest of the year, probably not in 2026, and possibly not for the rest of the decade, though a recession cannot be ruled out.
“if you agree with me that there's no recession for the rest of the year, probably not a recession in 2026, maybe not a recession for the rest of the decade”
The speaker fundamentally disagrees with the Fed's view that rates are still restrictive and need lowering; if data-dependent, the proper stance is 'none and done'—leaving rates unchanged rather than being biased toward cuts.
“I fundamentally disagree with the message of the Fed... They're basically saying that they believe that the Fed funds rate is still restrictive that it needs to be lowered”
Despite widespread bearishness on the dollar, the speaker is not bearish, arguing it has sold off in a fairly normal way near the bottom of a range and that foreigners continue moving money into large US capital markets.
“I know everybody's bearish on the dollar. Uh maybe my contrarian instincts are coming out too much here, but I'm not really bearish on the dollar. I I think it's kind of sold off in a fairly normal kind of sell-off”
The new tax bill's 100% depreciation allowance lets companies expense data centers entirely in the year built, creating powerful incentives to overbuild and potentially setting up a 'meltup-then-meltdown' once AI's limitations (hallucinations, weak reasoning) become apparent.
“in the bill is um 100% depreciation uh uh allowance which means that if you build a data center uh uh this this this year uh you get to depreciate to expense the whole thing this year... the uh incentives to uh go wild particularly in technology and particularly in data centers is is significant. Uh so uh this may turn out to be a meltup meltdown situation”
Trump's daily attacks on Powell are aimed less at making the FOMC cave than at weakening the dollar, by signaling the Fed will lose political independence once Powell departs, which appears to be working.
“I think a lot of it is actually aimed at weakening the dollar. It certainly seems to be working... beating up on uh Pal and indicating that the Fed is not going to be politically independent once Pal has gone as Fed chair, that may be weighing on the dollar.”
The economy proved resilient despite tight monetary policy in 2022-2024, and with unemployment at 4.1% (full employment) and inflation near 2%, the economy is essentially at 'nirvana,' implying the Fed funds rate is already where it should be.
“the unemployment rate uh actually ticked down to 4.1%. That's full employment... I I think we're basically in nirvana. Uh and if that's the case, then the Fed funds rate is where it should be.”
The market is increasingly discounting 2026 earnings, with analysts having stopped cutting estimates and now expecting $300 a share for the S&P 500 next year, matching the speaker's own forecast.
“They are now expecting earnings uh to be $300 a share next year, which just happens to be uh my forecast for next year. I think it'll be $300 a share for the S&P 500”
Despite the 'nirvana' framing, housing is unaffordable for working people and some are genuinely suffering, with younger families needing financial help from baby-boomer parents—a help mechanism not available to everyone.
“Everything is not wonderful. There are a lot of people that are suffering... homes cost too much. Uh my younger kids uh are having troubles making ends meet... not everybody has a family relationship uh with uh people that can can help like that.”
The market is back in a 'meltup' with the forward P/E at 21-22x, but the speaker hopes earnings beats in Q2 will give it more substance rather than leaving valuation 'full of air.'
“the multiple is back to 21 22 for forward earnings. Uh technology is is hot. it's the valuation multiple is is high.”
The bond yield forecast is 4.5% plus or minus 25 basis points through year-end, and a debt crisis is not imminent though it remains one of the few residual risks.
“it's working out 4 and a.5% plus - 25 basis points through the end of the year... I don't believe that... a credit uh a debt uh crisis is is right around the corner.”
The recession-probability reading on Polymarket fell from roughly 60% a few weeks ago (around the April 2 'liberation day' tariff announcement) to about 20% now, reflecting a large shift in recession expectations.
“We saw that in the poly markets uh data... I think it got up to something like 60% was the u probability of a recession this year uh only a few weeks ago. Now it's down to about 20%.”
The administration should treat its agenda (tariffs, big bill, Middle East, NATO) as largely accomplished and pivot to promoting those policies to hold congressional majorities in the midterms, avoiding any new disruptive moves.
“if I was advising Trump, I would tell him... you've done everything you promised... outline everything that you've accomplished... and don't screw anything up uh that would uh don't do anything that'll screw up uh the the midterms.”
Time flies and it's already July.
“time flies. It's already July”