Walsh Faces Crisis Upon Taking Office, Debt Market 'Death Spiral' Poses Greatest Challenge

Kevin Wash officially took office as the Chairman of the Federal Reserve on May 22nd, succeeding Jerome Powell whose term has expired. However, right from the start, this central bank chief handpicked by Trump faces severe challenges: the Iranian war, tariff pressures, and stubborn inflation are intertwined, The Wall Street Journal refers to the current situation as a "dangerous mix".

Wash shares Trump's inclination towards interest rate cuts, but reality may leave him as constrained as Powell. After the Federal Reserve lowered interest rates three times in 2025, Powell maintained the interest rate unchanged throughout this year, with the press conference in April becoming the last time he appeared during his term. According to the common rule, the yield on long-term Treasury bonds, closely linked to mortgage interest rates, should have remained stable, but since the outbreak of the Iranian war, the yield on 10-year U.S. bonds has continued to stand above 4.4%, causing a clear impact on mortgages, retirement savings, and even daily financial management.

Debt-ridden, the spiral is hard to break

The forces driving yields higher come from multiple directions. The Federal Reserve can decide the benchmark interest rate, but it cannot influence the yield on 10-year U.S. Treasury bonds - the latter is priced collectively by millions of investors based on inflation expectations, fiscal conditions, and global capital flows.

At present, investors are demanding higher returns to compensate for the risks of holding bonds, which is known in economics as the "term premium," reflecting the market's dual concerns about the prospects for U.S. inflation and the sustainability of debt. Consultancy RSM International points out that the Iranian war has pushed international oil prices above $90 per barrel, and inflationary pressures have consequently heated up, further narrowing the window for the Federal Reserve to cut interest rates.

The fiscal underpinnings are also not to be underestimated. Data from the Peter G. Peterson Foundation shows that the U.S. government's annual interest expenditure on debt is already close to $970 billion. As a large amount of old debt matures and is rolled over at the current higher interest rates, this figure will continue to rise.

The resulting "death spiral" causes great concern in the market: rising yields increase interest expenditure, the deficit expands, the government is forced to issue more Treasury bonds to fill the gap, the additional supply further pushes yields higher, and the cycle repeats, making it difficult to break. The U.S. Congressional Budget Office predicts that the federal debt ratio to GDP will rise from the current 101% to 120% by 2036, with annual interest expenditure reaching as high as $3.1 trillion.

Impact has been transmitted to the general public

The impact of this bond market turmoil has already taken effect on the general public. Homebuyers and borrowers applying for refinancing are facing the direct pressure of rising mortgage costs; credit card and auto loan interest rates are more closely linked to the Federal Reserve's policy interest rate, and as long as interest rate cuts remain unlikely, consumers' repayment burdens will be hard to alleviate.

By comparison, high-yield savings accounts, money market funds, and short-term Treasury bonds are quite attractive in the current environment, with the SGOV ETF, which tracks short-term U.S. Treasury bonds, yielding more than 4.3%. Analysts suggest that retired investors holding long-duration bond funds may consider reducing their exposure and shifting to short-term varieties to avoid interest rate volatility risks.

There is no dearth of solutions for breaking the "death spiral." If inflation indeed falls back, or if Washington takes substantive measures on fiscal restraint, market sentiment is expected to gradually recover. However, investors are still waiting for clear signals. This is the macro backdrop that Wash faces as he takes office and will also be an important reference for outsiders to judge his policy orientation.