In the world of mortgage lending, supply and demand play significant roles in shaping interest rates. However, policies—and their far-reaching implications—cannot be overlooked. While the general population might not fully grasp this, those in the industry should.
It’s important for loan officers (LOs) to understand that consumer mortgage rates are influenced by a range of factors largely outside the control of any single person or institution, including the President. For example, while former President-elect Donald Trump often emphasized lowering interest rates during his campaign, delivering on such promises is far from straightforward.
The Complexity of Interest Rates
During his campaign, Trump vowed to bring down interest rates, criticizing the Federal Reserve and its chair, Jerome Powell, for not cutting rates sooner. However, the mechanics behind mortgage and long-term loan rates extend well beyond the Federal Reserve’s influence. These rates are predominantly dictated by the bond market, where investors assess long-term risks, including:
- Potential inflation.
- Economic growth forecasts.
- The United States’ ability to manage debt over time.
The Federal Reserve can influence short-term rates, which affect how much banks charge each other for borrowing. These rates can trickle down to consumer loans, but the relationship is not always direct. For instance, mortgage rates have been known to rise even after the Fed cuts rates, as seen in September and November of 2024.
Macro Trends Trump All
Global economic factors often overshadow domestic policy when it comes to mortgage rates. Events such as international conflicts, disruptions in global supply chains, or natural disasters impacting food supplies can ripple through markets, influencing U.S. rates regardless of Federal Reserve actions.
Even when the Federal Reserve cuts rates, broader market trends—like investor sentiment in the bond market—often play a more significant role. This underscores the importance of understanding the macroeconomic environment when discussing rates with clients.
Trump’s Limited Control Over the Federal Reserve
Despite Trump’s campaign rhetoric, the President’s authority over the Federal Reserve is limited. The Fed operates independently, with its leadership protected by 14-year terms and a legal framework that prevents their dismissal without cause. Trump himself acknowledged his inability to directly control Fed policy, though he often expressed his views publicly.
How Policy Could Influence Rates
Outside of direct actions by the Federal Reserve, Trump’s policies could indirectly affect interest rates. For example:
- Tariffs and Inflation: Sweeping tariffs, such as those proposed on goods imported from China, could raise consumer prices, triggering inflation and, in turn, driving rates higher.
- Tax Cuts and Spending: Significant tax cuts may boost consumer spending, which could also contribute to inflation and push rates upward.
- Deficit Reduction: If the administration or Congress reduces the deficit and curbs spending, it could improve the bond market’s outlook, potentially easing rates. Conversely, unchecked spending could lead to higher rates.
The Bottom Line
Lenders should help borrowers understand that while federal policies and the President’s actions may influence the economy, mortgage rates are driven by a complex interplay of market forces, global trends, and investor behavior. Promises to lower rates are easier said than done, and many factors, including inflation and economic growth, remain unpredictable.
