The US Fed can't reduce long-term bond yields and the use of force will cause more problems than it solves

There’s no such thing as a sure thing in financial markets, but some things come pretty close. One of them is the proposition that there will be more interest-rate cuts next year—and another is that these reductions will have little to no effect on long-term rates.First, the cuts. US Federal Reserve Chair Jay Powell may have presided over his last announcement of a decrease, but odds are his successor will cut rates further next year.

It’s not just that President Donald Trump wants lower interest rates, which not only boost the stock market and credit offtake, but make servicing the national debt cheaper. It’s that there are financial risks in the current environment, in which rates are high after a long period of being exceptionally low: Getting rates back down may help the US avoid a credit crisis. But the government and financial markets may be in for a rude awakening.

Even if (when?) the Fed brings down short-term rates, the 10-year US Treasury bond yield will almost certainly not go down very much—at least not without significant financial repression.It is as predictable as it is inexplicable: The Fed cuts rates and long-term yields go up. It could be the market is sceptical that the likely next Fed chair, Kevin Hassett, will be serious about inflation. But even if Trump nominated the next incarnation of Paul Volcker, the Fed will probably not be able to lower the 10-year yield.This may seem strange—in theory, the 10-year bond should reflect what people expect the future short-term yield to be.

If the Fed is committed to easing in the future, rates should go down. And often the 10-year rate does follow the Fed policy rate. But not always.