Bessent's fix is simple: Stop requiring banks to hold capital reserves against U.S. Treasury Bonds
By Steve Moore
WASHINGTON, D.C. (Texas Insider Report) — President Trump is enraged that the Fed didn't lower interest rates last week. He – and many economists – believe that lowering the Federal Funds Rate would lower the federal government's borrowing costs.
Maybe. That's only true if lowering the short-term rates doesn't lead to a rise in long-term rates due to inflation, as happened last year when Jerome Powell cut rates before the election to help boost Kamala Harris.
But there is an easier way for the Fed to lower the federal government's borrowing costs – and the deficit – by tens of billions of dollars without risking inflation.
End the Obama-era bank rule that essentially penalizes banks for buying U.S. Treasuries and holding them in their reserves.
The Fed counts these Treasuries in its risk-insensitive "Supplementary Leverage Ratio," functionally treating them as ”non-zero risk” and requiring banks to hold capital against them.
This is despite the fact that they are among the safest assets on the planet.
End the Obama-era bank rule that essentially penalizes banks for buying U.S. Treasuries and holding them in their reserves.
The Fed counts these Treasuries in its risk-insensitive "Supplementary Leverage Ratio," functionally treating them as ”non-zero risk” and requiring banks to hold capital against them.This is despite the fact that they are among the safest assets on the planet.
Treasury Secretary Scott Bessent (right,) has been promoting this Fed policy change. The current rules reduce the demand for Treasuries, drive up yields, and increase borrowing costs on the $28 trillion debt held by the public.
Bessent's fix is simple: exclude Treasuries from the SLR, and that alone would lead to an increase in banks' purchases of these bonds.
The higher demand could lower Treasury yields by an estimated 30 to 70 basis points, saving Uncle Sam up to $70 billion a year.
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Steve Moore – a former Wall Street Journal Editorial Page writer and Chief Economist for The Texas Insider – is a Senior Fellow at both FreedomWorks and the Heritage Foundation. Along with Steve Forbes & Art Laffer, he is Co-Founder of the Committee to Unleash Prosperity. Using compelling charts, videos, and maybe even a little humor, Moore and the Committee's free Daily Newsletter provides information not readily available anywhere else – short and timely inside updates on the economy, the D.C. political landscape, and numerous other issues that help you stay informed and allow you to be the smartest person in the room.
