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Trump is already raising interest rates
Financial markets typically don’t start pricing in possible election outcomes until a month or two before Election Day. Investors are getting in early this year.
Since June 27, the yield on the 10-year Treasury note has jumped about 10 basis points, or one-tenth of a percentage point. That may not sound like much, but it is a reversal of a downward trend that has taken hold in recent weeks as soft inflation data has fueled hopes of interest-rate cuts.
Around June 27th, something seems to have changed investors’ interest rate outlook. Hmm, what could it have been? Oh, right! June 27th was the date of the first presidential debate between President Joe Biden and former President Donald Trump, during which Biden floundered and did not even seem coherent at times.
Biden’s performance was so disconcerting that it quickly changed the outlook for the election. Trump’s chances of winning have increased, but more importantly for markets, so have the chances of Trump winning and Republicans gaining control of both houses of Congress. Markets care about this because a president can’t implement his full agenda unless a friendly Congress is able to pass the legislation he supports.
“This is all about bond investors starting to price in the possibility that not only will Donald Trump emerge victorious, but that the GOP will take the House and Senate as well,” economist David Rosenberg of Rosenberg Research wrote in a July 3 analysis. “Investors are sniffing something here, and that is GOP control of Congress.”
As a real estate developer who once called himself “debt king,” Trump favors the lowest possible rates. But Wall Street thinks Trump’s policies in a second term would be more likely to raise rates than lower them.
Read more: How much control does the president have over the Fed and interest rates?
Heading up? Wall Street thinks Trump’s policies in a second term would be more likely to push rates up than down. (Photo by Clive Mason/Getty Images) (Clive Mason via Getty Images)
There are a few reasons for this. First, Trump wants to impose new tariffs on imports, which would raise the prices of thousands of everyday items, which is essentially inflationary. This would happen at a time when built-in inflationary pressures, such as tight global energy markets It is disruptions to shipping in the Red Seaare much stronger than when Trump was president, from 2017 to 2021.
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In 2022, the Federal Reserve began rapidly raising short-term rates to combat inflation that peaked at 9% that year. The Fed stopped raising rates last summer, and inflation is now at 3.3%. Recent data suggests that if nothing changes, inflation is likely to continue to fall and the Fed could begin gradually cutting interest rates by the fall, which would benefit home and car buyers and many other borrowers.
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But Trumpflation, if it develops, could put an end to those rate cuts. The Fed could delay rate cuts even with the prospect that Trump could win in November — especially if markets are signaling that that is the expected outcome. And if Trumpflation does materialize, the Fed may have to raise rates instead of cutting them.
Trump also wants to cut the corporate tax rate by another percentage point and extend individual tax cuts that are set to expire at the end of 2025. Such measures would force the Treasury to borrow much more than currently forecast, further pushing up record federal deficits.
There have already been some disconcerting spikes in Treasury auctions in recent months because of the sheer volume of federal debt in the market. Issuing even more could trigger the debt crisis that many analysts have been expecting for years. That will happen if/when there aren’t enough buyers for all the debt Uncle Sam is issuing, which will force rates to rise to attract buyers. When Treasury rates rise, all borrowing rates rise along with them.
The recent increase in the 10-year interest rate after the June 27 debate was even more evident until Fed Chairman Jerome Powell optimistic comments on inflation outlook on July 2. That pushed longer-term rates down a bit and revived hopes for a rate cut in September.
But there is still a Trump premium on rates. The total hike before Powell spoke was about 20 basis points, or two-tenths of a point. So it’s fair to consider that markets, for now, are pushing long-term rates two-tenths of a point higher than they otherwise would have been based on the odds of a Republican victory.
If Trump were to win, and rates were to rise the way investors seem to expect, that would likely put Trump on the warpath from day one. Trump has a long history of criticizing the Fed and its chairman, Powell, for not pushing rates down. During Trump’s first term, he was able to argue that there was little risk of inflation, so why not cut rates?
Inflationary pressures are much stronger now, and that won’t change if Biden leaves office, since much of the pressure is coming from outside the United States. If Trump succeeded in pressuring the Fed to cut rates anyway, the result would likely be higher inflation—and the same voter anger that sent Biden’s popularity tumbling. Voters may not see it until 2025, but it’s already a big blip on the market’s radar.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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