Borrowers hoping for lower interest rates will have to contend with a wild card: the presidential election.
Economists believe interest rates will rise if Republican Donald Trump wins a second term as president, and hopes of a Trump victory may already be contributing to higher rates. The 10-year Treasury rate has risen by more than half a percentage point since mid-September, even as the Federal Reserve has begun lowering short-term interest rates.
The 10-year rate directly affects borrowing rates for all types of consumers and businesses, but these rates are essentially fixed at 10 years. For example, since mid-September, the average interest rate on a 30-year fixed mortgage has increased from 6.08% to 6.54%.
Mr. Trump, a businessman with a large amount of debt, is known as a lover of low interest rates. When Trump was president, he criticized the Fed for raising interest rates and even complained that they weren’t effective enough when they cut rates. President Trump has argued this year that the president should have more control over the Fed and interest rate policy in general.
Read more: How Fed Rate Cuts Affect Bank Accounts, CDs, Loans, and Credit Cards
However, long-term interest rates like the 10-year are controlled by the market, not the central bank, and the market expects interest rates to rise if Trump wins. “President Trump’s policies would effectively lead to slower growth, higher inflation, and tighter Fed policy relative to the current situation,” forecaster Capital Economics said in an Oct. 28 analysis. “This signals an increase in U.S. Treasury yields.”
If Kamala Harris wins, the outlook for inflation and interest rates will be about the same as it is now, as she has not proposed any dramatic changes that would affect them. Under this scenario, Capital Economics projects that next year’s 10-year average would be around 4%, slightly lower than it is now. However, if Mr. Trump wins, the company expects the 10-year rate to rise by as much as 5%, and other rates to rise by similar percentages.
Two of President Trump’s policies will cause interest rates to rise. The biggest impact will come from his plan to impose a 20% tariff on most imports and a 60% tariff on products from China. That would directly cause inflation. Tariffs are taxes that raise costs and prices. U.S. importers will pay higher taxes and try to pass it on to their customers all the way to the shelves.
Read more: What is a tariff? How does it affect you?
President Trump also wants to deport millions of illegal immigrants in the country, which would shrink the U.S. workforce. Labor shortages can push up wages, and higher labor costs can also lead to higher prices.
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The country has just emerged from the inflation crisis, with annual inflation expected to reach 9% in 2022. The Fed raised short-term interest rates to lower inflation, and it worked. Inflation has now fallen to 2.4%, and the Fed began cutting rates again in September, indicating further rate cuts are on the way.
Short-term interest rates set by the Federal Reserve relate to interbank lending, not consumer loans. These affect long-term interest rates, such as the 10-year Treasury note, but other factors also come into play. Investors buy and sell U.S. Treasuries and other securities, and supply and demand determine the rates. Investors often try to predict future changes in policy or market conditions, which are factored into interest rates.
Republican presidential candidate former President Donald Trump speaks during a campaign rally at McAmish Pavilion in Atlanta, Georgia, Monday, October 28, 2024. (AP Photo/Julia Demarie Nikinson) · ASSOCIATED PRESS
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The recent rise in interest rates is likely due in part to economic indicators showing solid growth and spending, and no weakness that would suggest an impending recession. However, as the gambling market tilted in Trump’s favor, interest rates soared, and the odds of Trump winning with a Republican landslide that would give the party full control of Congress also increased.
Economist Ed Yardeni wrote in an Oct. 27 newsletter that “a sweep by either party would almost certainly spook bond investors, who are anticipating higher federal deficits and higher debt.” said. It would be normal for investors to raise interest rates if they believe that a landslide Republican victory is likely.
If Trump wins and implements his tariff and deportation plan, prices are likely to rise more than they otherwise would, forcing the Fed to stop cutting short-term interest rates and perhaps start raising them again. There is a possibility that you will not get any. Banks are fighting inflation. Long-term interest rates often rise under inflation as purchasing power declines and investors demand higher interest rates in return. The Fed has other tools that could lower long-term interest rates, but unless a future President Trump acquires them, they are thought to be best reserved for emergencies.
In addition to tariffs and deportations, President Trump is also planning a multi-purpose package of tax cuts and benefit increases that could add nearly $8 trillion to the national debt over the next decade. That would force the Treasury to issue more bonds, and at some point there could be so many bonds on the market that there aren’t enough buyers. Interest rates will rise in that case as well, as higher returns will be needed to lure investors out of other assets. Harris’ plan would also increase debt, but only by about $4 trillion, reducing pressure on markets.
Rising interest rates over the past two years have put a strain on consumers by increasing the cost of financing homes, cars, and other purchases. Interest rates began to fall slowly in May, which appears to correlate with a persistent improvement in consumer confidence, which had been depressed. But headlines are now reporting that mortgage rates are rising, not falling, justifying the still-depressing situation. Tune in on November 5th for a possible inflection point.
Rick Newman is a senior columnist at Yahoo Finance. Follow him on X @rickjnewman.
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