WASHINGTON — As a candidate, Donald Trump promised to free consumers from high interest rates. As president, doing so will likely be a slow process beyond his control.
Trump repeatedly said during the campaign that he would lower interest rates without saying how. He suggested that the president should have a say in setting rates set by the Federal Reserve and publicly criticized the central bank and its chairman, Jerome Powell, for not cutting interest rates sooner.
But while Trump has focused heavily on the Federal Reserve to lower interest rates paid by consumers or businesses, rates on mortgages and other long-term loans are beyond the control of any one person or institution. Instead, these rates are largely determined by the bond market, where investors look at a range of long-term risks, such as the likelihood of high inflation returning, the prospects for economic growth and the ability of the US to repay its debt. decades to come.
“I think macro trends are more important,” said Kent Smetters, a professor of business economics and public policy at the Wharton School of the University of Pennsylvania. “I don’t think the Federal Reserve has as much control as it used to.”
The Federal Reserve plays a role in influencing interest rates by setting the amount banks must pay short-term to borrow money from each other to carry out their day-to-day operations. This amount can be reduced to how much lenders charge consumers for the loan, but this is not always the case.
Mortgage interest rose After the Federal Reserve cuts degrees Chief Economist Ralph McLaughlin said that although the Fed cut interest rates for the first time since the pandemic in September and again on November 7, mortgage rates are expected to continue to rise in the coming days based on trends in the bond market. Realtor.com.
“The idea that the president can directly affect the Fed rate is a little unrealistic, but broader policies or expectations of policies have a more direct impact,” McLaughlin said.
Trump has no direct control over interest rates set by the Federal Reserve committee it includes seven members appointed for 14-year terms and five regional Reserve Bank presidents. According to the current law, the president cannot fire The removal of Powell or any member of the Fed’s Board of Governors without “cause,” so any of those members over a disagreement over interest rates, would be challenged in court.
Trump has tried to influence the Fed with his rhetoric before. During his first term in office, Trump said Powell, his 2018 appointee, was a greater enemy to America than Chinese President Xi Jinping, saying on Twitter that Powell had a “terrible lack of vision” and “lack of guts” and made no sense. no sight!”
Powell said during a Nov. 7 speech that if Trump asked him to resign, he would not do so, and that Trump was not allowed by law to fire him or any member of the Federal Reserve board.
While Trump admitted that he probably doesn’t have the authority to set rates or fire Powell, he said he won’t stop voicing his opinion on what the Fed should do.
“I think I have a right to say, ‘I think you should go a little higher or lower,'” Trump said at the Economic Club of Chicago last month. “I don’t think I should be allowed to order, but I do think I have the right to comment on whether interest rates should go up or down.”
Trump will finally have an opportunity to begin remaking the board in May 2026, when Powell’s term ends. Trump said in February that he would not re-appoint Powell. Whoever he nominates to replace Powell must be confirmed by the Senate, which is projected to be controlled by Republicans.
In an attempt to change the Fed by 2026, Trump’s economic adviser Scott Bessent floated the idea of creating a “shadow” Fed chairman, appointing Powell’s replacement long before his term expires. interview With Barron’s last month. Bessent, the chief executive of hedge fund Key Square, whom Trump has called “one of the brightest people,” said that while the person does not have decision-making authority, their comments could signal to financial markets where the authority is headed. on Wall Street.”
Interest rates are expected to start falling later this year if inflation remains under control, outside of any steps Trump may take with the Federal Reserve, economists predict.
Trump’s own policies could raise rates if they signal a return to higher-than-normal inflation. Trump has proposed broad tariffs on all goods imported into the United States, including a 60% tariff on imports from China. If past rates Either indicator is likely to trigger another wave of inflation that will raise the prices consumers pay for goods and push rates even higher. Significant tax cuts that put more money in people’s pockets can also cause inflation to rise.
“Anything that puts money in consumers’ pockets, whether it’s tax breaks, tax credits or other types of incentives, has the potential to push prices up, which means higher mortgage rates,” McLaughlin said.
One of the most effective ways to keep interest rates low over the longer term would be to keep inflation at the current 2% to 3% and for the US to take steps to reduce its deficit and rein in spending. Smetters said the market is more favorable for lenders.
“Right now, capital markets are betting that eventually Congress and the president will act together to stabilize the debt-to-GDP ratio,” Smetters said. “As soon as they stop believing it’s true, you’ll see the 30-year mortgage really show up.”
But reducing rates to pandemic levels in the short term is unlikely unless there is a major economic downturn.
“There aren’t many policies at the president’s disposal that can actually lower rates,” McLaughlin said. “Except for policies that could harm the economy itself.”