Treasury accused of 'backdoor' economic stimulus before the election

The Treasury is under fire for allegedly issuing a specific type of debt to boost the economy ahead of November's presidential election.

In a new paper, economists Nouriel Roubini and Stephen Miran argue that the Treasury is “usurping core functions of the Federal Reserve.”

They claim the department's increased issuance of short-term debt is artificially suppressing long-term interest rates, a move that appears to contradict the Federal Reserve's current monetary policy stance.

Roubini describes this strategy as "a backdoor form of quantitative easing.”

"You are achieving the same result of reducing long-term interest rates the way the Fed was doing — by manipulating not the demand for long-term bonds, but the supply of them,” Roubini told Axios.

"While we have no smoking gun, I would say if it walks and quacks like a duck, it must be a duck.”

Treasury officials vehemently deny these accusations, insisting their debt issuance decisions are based on market conditions and fiscal needs, not political motivations.

"I can assure you 100% that there is no such strategy. We have never, ever discussed anything of the sort," said Treasury Secretary Janet Yellen in an interview with Bloomberg.

Shifting debt strategy raises eyebrows

The Treasury has increased its short-term debt issuance to around 20% of all outstanding debt over the past year, pushing the upper limits of previous norms. A recent update to Treasury guidelines now considers 20% the average rather than the maximum, a change that has raised questions.

This shift in debt issuance can influence long-term interest rates, potentially making borrowing cheaper across various sectors of the economy. Such an effect could stimulate economic activity, an outcome that some view as suspicious given the upcoming election.

"Some people, including myself, believe this is being done to artificially stimulate markets in the run-up to the election," said Sen. Bill Hagerty (R-Tenn.) in a hearing last month.

A less “malicious” explanation

Some experts offer a more benign interpretation of the Treasury's strategy. TD Securities strategist Gennadiy Goldberg suggests the department is acting to maintain market stability rather than for political gain.

"There isn't malicious intent, but rather Treasury trying to prevent a full-blown bond market meltdown by issuing too much in the wrong spot and pushing interest rates sharply higher in the process," Goldberg explains.

This view aligns with how the Treasury typically operates. Career officials, not political appointees, usually manage debt decisions. These officials regularly consult with private sector experts to inform their strategies.

Market factors may also explain the shift. Growing demand for short-term debt from money-market funds and the need to replenish reserves after last year's debt ceiling negotiations could be driving the change in strategy.

Regardless of intent, Roubini and Miran estimate this strategy has significantly impacted the market. They calculate that the yield on 10-year Treasury bonds has been pushed down by approximately 0.25 percentage points over the past year.

The economists argue that this effect is comparable to a full percentage point interest rate cut by the Federal Reserve.