Why the Fed Watches the Budget Deficit

On this episode of The Macro Memo, Lucas and Luna examine a paradox: inflation is cooling, the Fed is on hold, and yet the yield curve is steepening as the ten-year Treasury yield climbs. The culprit, they argue, is the exploding U.S. budget deficit, which surged to its highest level since March 2021 in July. With nominal GDP at $32.5 trillion and the government borrowing heavily, bond investors are demanding a risk premium. Lucas explains how deficit-driven supply is pushing long-term yields up even as short-term rates stay flat, and why the Fed—despite its independence—can't ignore fiscal reality. They discuss whether the deficit is now a bigger driver of long-term rates than inflation expectations, and what it means for the Fed's next move. A sharp, focused conversation about the intersection of fiscal policy and monetary policy, grounded in the latest data. #BudgetDeficit #FederalReserve #TreasuryYields #FiscalPolicy #MonetaryPolicy #BondMarket #Inflation #EconomicGrowth #YieldCurve #USDebt #FedOnHold #LongTermRates #RiskPremium #Economics #MacroMemo #FexingoBusiness #BusinessPodcast #DailyEconomics Keep every episode free: buymeacoffee.com/fexingo