Three weeks after his second presidential term, Donald Trump largely gets his way in the cabinet, deregulation, deportation and the dismantling of the federal bureaucracy by Elon Musk. His greatest priority, a huge set of tax cuts that require conference legislation, comes into the picture.
However, one thing is not according to plan: interest rates. And it is already under the skin of Trump.
“Interest rates must be reduced,” Trump published on social media on 12 February. “Something that should go hand in hand with rates.”
Markets do not see it that way – and unlike the many politicians Trump has been steamed in Washington, markets cannot be bullied. Stubbornly high interest rates can in fact end the curse of Trump’s second term.
The Federal Reserve determines short-term interest rate that usually affects banks, and Trump has already trained its weapons on FED chairman Jay Powell. Trump blames the Fed for not going off high inflation that raged two years from 2022, and he shot the Fed when it chose to refrain from a rate reduction during the last meeting in January.
What most consumers and companies give are, there are rates in the longer term, such as those with mortgages, car financing and business loans.
Read more: How the decision of the FED rate influences your bank accounts, loans, credit cards and investments
Short and long-term rates normally move in the same direction, which means that the FED has some influence on the loan interest that most people pay. But markets also have a say. And since last September, long-term rates, represented by the return on the 10-year-old Treasury bond, have increased by about one percentage point, although the FED has reduced a similar amount in the short term.
The bond market does not explain itself, but investors take the rise in 10-year rates to reflect the concern about higher future inflation. These concerns are also shown in other data, such as the monthly consumer surveys of the University of Michigan, who show that consumers are increasingly thinking that inflation will be higher in a year and in five years.
There are two important reasons why inflation could worsen.
One is that price increases in some spending categories, such as housing, insurance and childcare, remain continuously high, together with egg prices for eggs caused by bird flu. Not much can do that. The other reason is that companies and consumers expect that Trump’s rates increase prices more than they would usually rise. There is something that Trump can do about it. But so far he chooses not to do it.
Rates are one of Trump’s favorite policy tools and he applies them richly. Trump has imposed a rate of 10% on most Chinese imports and 25% rates on the most imported steel and aluminum. He has threatened 25% rates for Mexican and Canadian input, together with adapted “reciprocal” rates for a large number of trading partners who have higher obstacles to purchases of American goods than we are on those of them.
Read more: What are rates and how do they influence you?
Trump says that he will ‘demand’ lower interest rates, and due to an inexplicable logic he seems to think that this would supplement his rates. If Trump had the total control over the Federal Reserve, he could force it to lower the short -term rates. The likely result would be even worse, as history has shown. Fortunately for investors, Trump has no control over the FED and chairman Powell has indicated that he will remain insensitive to political pressure.
There is almost nothing that Trump can or can do to control long -term rates, making it increasingly striking. If inflation goes higher, as some expect, the rates would probably also go higher. That is because the eroding value of money force investors to find a higher return to commit their money.
Mainstream predictors think that the 10-year-old Treasury rate will remain near the current level, about 4.5%, for the following year or two. That amounts to the mortgage interest of around 7%.
Capital Economics says that the 10-year-old treasury could reach 4.75% if Trump’s rate war gets worse than the markets expect. Some strategists think that it could surpass 5%, with most other consumer and business rates rising accordingly.
There is nothing wrong with interest rates at those levels – except that they are probably raging Trump.
During his first term (prior to COVID), the 10-year-old treasury was on average only 2.42%and even then Trump complained that the rates were too high. The rates are now almost double those of those levels. The mortgage interest, currently around 7%, are near historical averages, but almost three points higher than during Trump’s first term. The affordability of housing is now much worse than during Trump 1.0.
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Trump promotes himself as the fixer that can solve all the problems that other politicians cannot do, through superior deal options and other unique talents. So political analysts start to play what Trump could do if the interest rates do not obey his order to refuse.
Jaret Seiberg from TD Cowen suggests that Trump could insist on a larger government role in covering interest rates, starting with the rates on credit card balance, which are often double digits. “We are worried that the door starts to open when giving the federal government a stronger usury authority,” Seiberg wrote in an analysis of 12 February.
A reason that could be worrying is that it could decrease the bank’s profit. That cannot bother ordinary people, except that banks are unable to set rates that are high enough to praise risks, borrow less money and possibly stop borrowing to borrowers with a higher risk. A credit crisis would hurt some consumers and possibly delay the entire economy.
Rate Looking: President Donald Trump speaks with reporters in the Oval Office of the White House, where he signed an executive order, Thursday 13 February 2025 in Washington. (AP Photo/Ben Curtis) ·Associated Press
Peter Orszag, CEO of investment company Lazard, claims that other countries who want to take revenge, in the midst of Trump’s trade wars, can use even higher rates as a kind of economic weapon. If foreign holders of American debts such as Japan and China wanted to take revenge against Trump’s rates, they could sell part of their treasury companies, which would push the American rates and force the entire US economy to use higher loan costs to grab.
“This makes Treasury market a ripe goal if negotiations result in long -term conflict,” Orszag recently wrote in the Washington Post.
It may all sound a bit fantastic, but that also applies to hiring a technical oligarch without government experience to a federal bureaucracy that is multiples larger than the largest company. If the rates are falling and Trump seems satisfied, this can be a false alarm.
But nobody can be sure what Trump, who is used to getting his way, will do if he meets the resistance of an immobile market.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Extingy And X: @rickjnewman.
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