Commentary: If Trump wins, expect interest rates to rise
10/29/2024 20:58
Borrowers hoping for a break on interest rates have a wild card to contend with: the presidential election.
Borrowers hoping for a break on interest rates have a wild card to contend with: the presidential election.
Economists think interest rates will be higher if Republican Donald Trump wins a second term as president, and expectations of a Trump win could already be helping to nudge rates higher. The rate on 10-year Treasury bonds has risen more than half a percentage point since mid-September, even though the Federal Reserve has begun cutting short-term rates.
The 10-year rate directly affects all manner of consumer and business borrowing rates, which are essentially anchored to 10-year. Since mid-September, for instance, the average 30-year fixed mortgage rate has risen from 6.08% to 6.54%.
Trump, who borrows heavily himself as a businessman, is a famous fan of low rates. When Trump was president, he bashed the Federal Reserve for raising rates and even complained that it didn’t go far enough when it cut rates. This year, Trump has argued that the president should have more control over the Fed and over interest rate policy in general.
Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards
But it’s the market, not the central bank, that controls long-term rates such as the 10-year, and the market sees higher rates ahead if Trump wins. “Trump’s policies, on net, would lead to weaker growth, higher inflation, and somewhat tighter Fed policy relative to the status quo,” forecasting firm Capital Economics explained in an Oct. 28 analysis. “That points to higher US Treasury yields.”
If Kamala Harris wins, the outlook for inflation and interest rates would be about the same as it is now, since she hasn’t proposed any dramatic changes that would affect rates. Under that scenario, Capital Economics expects the 10-year to average around 4% for the next year, slightly lower than it is now. But if Trump wins, the firm sees the 10-year rising to as high as 5%, with other interest rates rising in similar proportion.
Two Trump policies would drive rates higher. The biggest effect would come from his plan to slap a 20% tariff on most imports and a 60% tariff on goods from China. That would be directly inflationary. Tariffs are a tax that raises costs and prices. US importers would pay the higher tax and try to pass it on to their own customers, all the way to store shelves.
Read more: What are tariffs, and how do they affect you?
Trump also wants to deport millions of migrants in the country illegally, which would shrink the US workforce. A shortage of workers pushes wages up, and higher labor costs can also lead to higher prices.
We’re just coming out of a bout of inflation, with the annual inflation rate hitting 9% in 2022. The Fed hiked short-term rates to bring inflation down, and it worked. The inflation rate is now down to 2.4% and the Fed started cutting again in September, indicating more cuts are on the way.
The short-term rates set by the Fed relate to interbank lending, not consumer loans. They do affect long-term rates such as the 10-year Treasury, but so do other factors. Investors buy and sell Treasurys and other securities, and it’s supply and demand that determines those rates. Investors often try to anticipate future changes in policy or market conditions, which in turn gets priced into rates.
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The recent uptick in rates is probably due in part to economic data showing solid growth and spending and no weakness that might suggest an imminent recession. But rates have also jumped as betting markets have swung in Trump’s favor, and so have the perceived odds of Trump winning in a GOP sweep that gives Republicans full control of Congress.
“A sweep by either party will almost certainly unnerve bond investors, who can anticipate higher federal government deficits and more debt,” economist Ed Yardeni wrote in an Oct. 27 newsletter. It would be normal for investors to push rates higher if they thought a GOP sweep was becoming more likely.
If Trump does win and he follows through on his tariff and deportation plans, prices would likely rise more than otherwise, which could force the Fed to stop cutting short-term rates and perhaps start hiking all over again, which is the main way the central bank combats inflation. Longer-term rates often rise amid inflation because purchasing power declines and investors demand higher rates as compensation. The Fed has other tools that can bring down longer-term rates, but those are considered best saved for an emergency — as long as a future President Trump doesn’t get ahold of them.
In addition to tariffs and deportation, Trump also plans a smorgasbord of tax cuts and benefit increases that could add nearly $8 trillion to the national debt during the coming decade. That would force the Treasury Department to issue even more debt, and at some point, there could be so much government debt on the market that there aren’t enough buyers. That, too, would push rates up, since it would take higher returns to draw investors out of other assets. Harris’s plans would raise the debt too, but only by about $4 trillion, putting less pressure on markets.
The higher rates of the last two years have strained consumers by pushing up the cost of financing homes, cars, and other purchases. Rates started to slowly decline in May, and that seemed to correlate with grudging improvements in consumer confidence, which has been depressed. But headlines now inform that mortgage rates are rising, not falling, so the gloom remains justified. Watch Nov. 5 for a possible inflection point.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on X at @rickjnewman.
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