Study says Trump is nudging interest rates down — with potentially dangerous consequences
President Trump is known for speaking his mind. He uses Twitter and the pulpit to get his messages across.
This year, he’s been tweeting and commenting a lot about the Federal Reserve and interest rates. Like many, Trump wants mortgage rates to remain low.
It would be easy to write these tweets off. After all, the Fed is an independent organization that’s designed to be protected from executive influence.
But recent data shows that Trump’s tweets might actually be helping to push the fed funds rate lower — and by extension, mortgage rates. This can have good and bad consequences.
The U.S. is still enjoying ultra-low interest rates. But history shows that presidential influence over the Fed has the potential to backlash and cause rates to skyrocket.
We’ll be watching to see how Trump’s back-and-forth with the Fed plays out. In the meantime, you can take advantage of today’s low rate by locking in before anything changes.
What Trump has said about the Fed and interest rates
“I think the Federal Reserve should cut rates regardless of this deal because we’re higher than other nations... It’s ridiculous... We have a great economy, but we have a Federal Reserve that’s not in step with the rest of the world. So I think they ought to get in step.” —President Trump
This statement follows a series of Trump comments from earlier this year, in which the President used more and more expressive language as the Fed’s September meeting was approaching.
Among the highlights, Trump called the Federal Reserve and its chairman Jerome Powell “Boneheads,” and called for them to get “interest rates down to ZERO, or less.”
....The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”— Donald J. Trump (@realDonaldTrump) September 11, 2019
Of course, the Fed isn’t the only organization taking heat from Trump. And it would be easy to bypass these tweets as just another in a long line of the President’s Twitter-based campaigns.
However, a recent study shows that Trump’s tweets and comments about the Fed might have a measurable impact on national economic policy.
Study: Each Fed-related Trump tweet pushes the Fed Funds Rate down by 0.30 basis points
A new report by the National Bureau of Economic Research (NBER) had some interesting findings:
- There is market-based evidence that Trump impacts expectations about monetary policy
- The effect of Trump’s tweets about the expected Fed Funds Rate is negative and strongly statistically significant
- The average effect of Trump’s tweets has pushed the Fed Funds Rate lower by -0.30 basis points (bps) per tweet. The cumulative effect of these tweets has pushed the fed funds rate down around 10 bps — or about 0.10%
- It is suggested that this political pressure from the President can pose a significant threat to the independence of the central bank/Federal Reserve
Minus 0.10% might not sound like a huge impact on national interest rates. But given that the Fed’s target rate change at any meeting is just 0.25%, this is actually a significant number.
The possible influence of the President’s tweets on the Fed has some economists worried. They fear central bank independence — or at least, public perception of the central bank’s independence — is on the decline.
And a less-independent Federal reserve has had extremely negative implications in the past.
An independent Fed is still swayed by markets — and Trump influences markets
It’s important to know that the Federal Reserve does not directly control mortgage rates. But it influences the direction in which mortgage rates move.
That’s because, as the nation’s central banker, the Fed’s actions and what it says are watched closely by Wall Street. These actions include setting the Fed Funds Rate.
“The Federal Reserve is expected to be independent of politics. It reacts to markets to regulate federal fiscal and monetary policy. And it protects the economy and national banking system,” says Bruce Ailion, Realtor and attorney.
“When [Trump] tweets about interest rates and the economy, it impacts market perceptions and expectations. And it is the market that drives Fed policy.” —Bruce Ailion, Realtor and attorney
Ailion also notes that Trump might not have a direct impact on the Fed. But he can, however, turn the tides of market sentiment.
“Trump’s tweets can impact market sentiment. When he tweets about interest rates and the economy, it impacts market perceptions and expectations. And it is the market that drives Fed policy,” adds Ailion.
How Trump’s words can backfire
While some give Trump credit for helping to lower mortgage rates, there can be downsides.
The main concern is a less-independent Fed — which could potentially lead to higher interest rates, despite the current low-rate environment.
Per the NBER report: “Establishing central bank independence was pivotal for containing inflation by curbing political incentives for expansionary monetary policy…a monetary authority with greater autonomy is associated with lower and more stable inflation.”
Also, HousingWire points out that double-digit mortgage rates in the late 1970s and 1980s were in part due to a president having too much influence over the Fed.
“Sustained attacks on the Fed can lead to policy aligned with partisan politics. And that can erode confidence in our increasingly interconnected monetary, corporate, and political partners across the globe.” —Mike Hennessy, CEO and founder, Harbor Crest Wealth Advisors
“The importance of independent monetary policy can’t be overstated,” cautions Hennessy. “Sustained attacks on the Fed can lead to policy aligned with partisan politics. And that can erode confidence in our increasingly interconnected monetary, corporate, and political partners across the globe.”
“Any time people impact market expectations, it can have an adverse impact on markets,” says Ailion. “Tweeting that spooks or pumps market perceptions can move the market in ways that distort reality — both in negative and positive directions.”
How much influence does Trump really have over interest rates?
According to the NBER’s research, Trump’s tweets may have indirectly caused a -10 bps change in the Fed Funds Rate.
That’s significant, says Mike Hennessy, CEO and founder of Harbor Crest Wealth Advisors.
“The magnitude of that change was considerable. It’s nothing to sneeze at,” says Hennessy.
Remember, though, that each tweet in isolation is worth only a decrease of 0.30 bps, per the study. That’s equal to about 83 strong tweets about the Fed to lower the federal funds rate by 0.25% (25 basis points).
“The President may tweet at the Fed,” says Hennessey. “But does that mean that all of the changes in rate expectations can be attributed solely to the cumulative tweets of the President?”
He continues, “These tweets surely can apply some political pressure. But the market considers other inputs, too. These include trade wars, foreign economies, and the manufacturing pullback.”
James McGrath is the co-founder of Yoreevo. He sees no evidence that the Federal Reserve actually cares what Trump says.
“I don’t believe there is any correlation between Trump’s tweets influencing the Fed and then the Fed influencing mortgage rates,” says McGrath.
Instead, he adds, “Fed Funds Rate expectations influence mortgage rates. That’s because the market embeds current and future Fed Funds Rates into current bond prices—including mortgages.”
What it all means for you
Future home buyers probably aren’t going to complain about Trump pushing interest rates lower.
But if analysts are right, and markets are swaying to executive pressure, there could be negative consequences to come — including higher mortgage rates down the road.
Whether or not Trump is to thank, mortgage rates are extremely low right now. You can take advantage by getting pre-approved for a mortgage or refinance now, before anything changes.