Key Points
- President Trump's economic agenda could have a downstream impact on mortgage rates. Generally, the expert consensus points to higher rates as a result of Trump administration policy proposals.
- Research shows that tariffs tend to have an inflationary effect, potentially leading to higher mortgage rates and increased homebuilding costs.
- Bond pricing, and thus mortgage rates, are influenced in part by fiscal policy. Some of Trump's proposed tax plans could increase the U.S. government's debt burden and keep long-term interest rates elevated.
Long before President Donald Trump regained control of the White House, he said on the campaign trail that he would drive down mortgage rates to 2% "by quickly defeating inflation." However, his policy proposals focusing on tariffs are more likely to rekindle inflation, while tax cuts are expected to increase the federal deficit - all of which could keep rates higher for longer.
Tariffs Could Stoke Inflation
Mortgage rates have risen significantly since Trump's election victory. On one hand, recent data shows that inflation hasn't been slowing as quickly as the Federal Reserve would like. Another contributing factor is that markets are hinging on heightened long-term inflation risk if Trump makes good on his promise to increase tariffs.
When inflation is high, the Federal Reserve can combat price growth by raising short-term interest rates. And when short-term rates are higher, long-term rates on Treasury bonds - and by extension, mortgages - must also rise to attract investment. With Trump's tariffs on the horizon, inflation and interest rates are poised to stay higher for longer.
How Trump's Policies Could Impact Rates
While Trump can't directly set the federal funds rate as he's promised to do, there are ways that his policies and those of Congress can indirectly affect rates. Here are some ways the president can impact interest rates:
Appoint and Nominate Fed Officials
One of the ways the president does directly influence the Fed - and therefore, could indirectly influence Fed actions - is by nominating members of the Board of Governors of the Federal Reserve.
The seven board members are nominated by the president and confirmed by the Senate to serve 14-year terms. Meanwhile, the chair and vice chair serve four-year terms.
Trump will have the opportunity to nominate a new chair in 2026, and he may be more inclined to choose someone he expects will have goals aligned with his.
Implement Fiscal Policy
While monetary policy - including setting interest rates - is up to the Fed, Congress and the president have the power to implement fiscal policy. These policies can affect employment and inflation, which can then lead the Fed to take certain actions on interest rates.
That being said, many of Trump's proposed policies are expected to increase inflation rather than decrease it, which could result in higher interest rates - the opposite of Trump's intended result.
When inflation gets too high, the Fed may raise interest rates as a means of controlling it. Higher interest rates often encourage people to spend less money, which can help reduce inflation. As a result, if Trump and Congress pass many inflationary policies, we could see interest rates increase, not decrease.
That being said, other potential fiscal policies could reduce inflation and, therefore, encourage the Fed to lower interest rates. For example, if Congress and the president lower government spending, which Trump has pledged to do, it could reduce public spending and bring inflation down with it.
