When the Treasury buys back its own long-term bonds and yields keep climbing anyway, the bond market is telling us something about deficits and inflation. And when the Fed responds, the same interest rate change lands very differently depending on where you sit.
Three takeaways
- Three forces are pushing long-term rates up, and none of them is going away soon. EJ points to inflation expectations tied to the conflict with Iran, heavy Treasury borrowing, and a wave of corporate debt from companies building AI data centers. That's why mortgage rates are sitting around 6.6% and credit card rates are staying high.
- The Fed has one tool, and it doesn't hit everyone the same. When the Fed raises rates, Black unemployment tends to rise first and fastest. EJ's research finds that adding the Black-White unemployment gap to the Taylor rule explains the Fed's actual rate decisions from 1975 to 2007 better and cuts prediction error by about 10%. He reads the gap as an early signal of labor market slack, not a target.
- Stablecoins are growing fast, mostly outside the U.S. They went from about $5 billion to more than $300 billion since 2019, largely in countries trying to escape high inflation. In normal times, money moving in and out of stablecoins barely touches Treasury bills or the repo market. In the 2022 and 2023 crisis episodes, it did.
About this episode
We recorded this right before the fall semester, during a week when the bond market did something weird. Long-term Treasury yields jumped, the Treasury stepped in to buy back some of its long bonds, and the next day yields were climbing again. It reminded me a little of the instability I saw in the mortgage market before 2008, and I wanted someone to tell me if I was being dramatic. EJ Ume spent 2007 to 2009 at Credit Suisse valuing the mortgage-backed securities and CDOs at the center of the financial crisis, so he was the right person to ask.
He didn't tell me I was overreacting. EJ sees the market shrugging off the buyback as a real signal. We're at roughly $40 trillion in debt, about 122% of GDP, with a deficit estimated near $2 trillion this year, and we're running deficits that size without a recession. Bond investors want to be paid more to hold that debt. So if you're shopping for a mortgage or carrying a credit card balance, you're the one paying for it.
From there we get into EJ's research on who feels a Fed rate change first, why the K-shaped economy explains the gap between "the data looks fine" and "I don't feel fine," and what a stablecoin actually is. We also talk teaching. EJ posts news articles with short summaries on LinkedIn so his students keep learning after the semester ends, and he hasn't allowed phones or laptops in his classroom since he arrived at Miami. He got pushback the first year or two. Now his evaluations thank him for it.
We end on forward guidance. I'm team forward guidance. EJ thinks the Fed can say less than it has in the past but shouldn't go quiet, because then markets end up guessing from interviews. With a new Fed chair, I think this is the debate to bring into your money and banking class this year.
Listen if you teach macro or money and banking and want a current, real example of the bond market pushing back, or if you're a student wondering whether to work before a PhD.
Our guest
EJ Ume is an associate professor of economics at Miami University in Oxford, Ohio. He earned his PhD from the University of Alabama in 2014, a master's from Duke University and a BA from Eastern New Mexico University. Before academia, he was an analyst in Credit Suisse's valuation and risk group from 2007 to 2009. His research looks at how monetary policy moves through banks and housing markets to households and firms, who bears the cost, and more recently how stablecoins affect money markets. He teaches money and banking and monetary theory and policy. Connect with EJ on LinkedIn
What we cover
- 00:00Welcome, and meet EJ
- 02:15Why yields keep rising: inflation, Treasury borrowing and AI debt
- 04:21The Treasury steps in and the market shrugs
- 06:09Recession-sized deficits without a recession
- 07:10What would calm the bond market
- 08:13From Duke to Credit Suisse in July 2007
- 10:50Should you work before a PhD?
- 13:11Why EJ posts the news on LinkedIn
- 15:53EJ's research: how a rate change reaches Main Street
- 19:12The augmented Taylor rule
- 21:46The K-shaped economy and why people don't feel the data
- 25:04What's a stablecoin?
- 30:25More financial choices than ever, and who gets left behind
- 33:46Teaching money and banking under a new Fed chair
- 35:15No laptops, no phones
- 38:25Takeaways, and team forward guidance?
For the classroom and your conversations
- The Treasury bought back some of its own long-term bonds and yields went up anyway. If you were a bond investor, what would make you keep asking for a higher return?
- Two neighbors hear the economy is strong. One owns a home and a retirement account, the other rents and has neither. Why might they disagree about how the economy is doing?
- EJ argues Black unemployment can be an early warning sign for the whole labor market. What's the difference between the Fed watching a number and the Fed targeting it?
- Why would someone in Nigeria or Venezuela want a dollar stablecoin more than someone in Ohio?
- Should the Fed tell us where it thinks rates are headed, or keep markets guessing?
Are you team forward guidance or not? Tell me in the comments.
Instructor resources
For educators bringing this episode into class.
Use it Monday
Activity · 20 minutesRun the Taylor rule two ways. Give students the standard rule (rate = 2% + inflation + 0.5 × (inflation − 2%) + 0.5 × output gap) and the inflation, output gap and fed funds rate for one quarter in the 2001 recession. Have them calculate the rule's recommended rate, then add the gap between Black and white unemployment for the same quarter and talk through how it would move the answer. Ask: which version better matches what the Fed actually did, and why might a group that loses jobs first tell the Fed something the overall unemployment rate misses?
Pair it withEJ's open-access paper in Economics Letters, with the figure comparing actual and predicted fed funds rates. Get it
Research mentioned in this episode
Ume, E. S. (2025). Racial disparities and monetary policy: Evidence from augmented Taylor rules. Economics Letters, 257, 112692. EJ's augmented Taylor rule paper (open access). Read it
Ahmed, R., & Aldasoro, I. (2025). Stablecoins and safe asset prices (BIS Working Paper No. 1270). Bank for International Settlements. Related work on how stablecoin flows move Treasury bill yields. Read it
Reuters. (2026, August 19). US Treasury doubles bond buybacks as yields come under pressure. The buyback expansion we discuss at the top of the episode. Read it