Group 1: Background of the Fed's "Third Mission" - The Federal Reserve's "third mission" of promoting moderate long-term interest rates was established in the 1977 Federal Reserve Act but has been largely overlooked in recent discussions[5] - On September 3, 2025, new Fed Governor Stephen Milan's reference to the "third mission" during a congressional hearing led to significant market reactions, with 10-30 year Treasury yields dropping by approximately 30 basis points[2][8] - Milan argues for a substantial rate cut, suggesting that the appropriate policy rate should be lowered from 4.26% to 2.49% based on non-monetary factors like rent and trade policies[16][13] Group 2: Central Bank Intervention Experiences - Historical interventions by central banks (US, Japan, Eurozone) typically occur during major economic crises, primarily to alleviate liquidity issues and create a low-interest environment[22] - Tools for controlling long-term bond rates include lowering policy rates, forward guidance, asset purchases, and balance sheet adjustments, with asset purchases showing the most significant effectiveness[22] - While these interventions can reduce fiscal costs, they also carry risks such as potential high inflation, asset price distortions, and conflicts between monetary and fiscal authorities[23] Group 3: Controversies Surrounding the "Third Mission" - There is debate over how to define "moderate" long-term interest rates, with estimates of the neutral rate varying widely[3] - The effectiveness of the "dual mandate" in achieving the "third mission" is questioned, especially as current long-term bond yields appear higher than what is considered moderate[3] - Concerns exist regarding whether lowering bond yields could lead to higher inflation, reflecting a conflict between monetarist views and the Fiscal Theory of the Price Level (FTPL)[3] Group 4: Market Implications of Practicing the "Third Mission" - In the short term, discussions around the "third mission" may trigger expectations of monetary easing, thereby lowering medium to long-term bond yields[2] - The actual impact on long-term yields remains uncertain and is contingent on future inflation trends and fiscal policies in the US[2] - The implementation of the "third mission" could weaken the Fed's independence and contribute to a narrative of "de-dollarization," potentially leading to a weaker dollar and benefiting gold and non-US assets[2]

Core Viewpoint - The Trump administration is pushing the concept of "moderate long-term interest rates" into the core of monetary policy, potentially disrupting decades of investment norms on Wall Street [1][2] Group 1: Policy Implications - The reference to "moderate long-term interest rates" by the Trump-nominated Federal Reserve nominee, Milan, has sparked significant discussion among bond traders, highlighting a previously overlooked "third mandate" of the Federal Reserve [1][2] - This shift indicates the Trump administration's willingness to leverage Federal Reserve regulations to justify intervention in the long-term bond market, which could undermine the Fed's long-standing independence [2][3] Group 2: Market Reactions - Analysts are exploring various potential methods the Trump administration and the Federal Reserve might employ to control long-term interest rates, prompting adjustments in investment strategies [3] - Possible policy options include the Treasury selling more short-term Treasury bills while repurchasing longer-term bonds, or more aggressive measures like quantitative easing (QE) to purchase bonds [3][4] Group 3: Historical Context and Risks - Historical precedents for Federal Reserve intervention in long-term rates include actions taken during World War II and the post-war period, as well as during the global financial crisis and the COVID-19 pandemic [5][6] - Concerns about inflation risks are prevalent, with warnings that attempts to suppress long-term rates could backfire if inflation remains above target levels [6][8] Group 4: Debt and Interest Rate Dynamics - The ambiguity surrounding the term "moderate long-term interest rates" allows for broad interpretations, which could justify various policy actions [7] - The current level of 10-year Treasury yields around 4% is significantly lower than the historical average of 5.8% since the early 1960s, suggesting that unconventional policies may not be necessary [7] - The U.S. national debt has reached $37.4 trillion, with expectations that lower interest rates will help reduce the cost of financing this substantial debt [7][8]