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After Joe Biden’s disastrous performance in last week’s presidential debate, Donald Trump’s chances of winning appear to have increased significantly.
If Trump wins, one of the key questions for the economy and your finances is: What will happen to interest rates?
Interest rates fell during the Trump presidency (2017-2021) amid low inflation and moderate economic growth. They remained historically low during the first year of the Biden administration.
But interest rates started rising in March 2022, when the Federal Reserve raised interest rates in the face of runaway inflation. These higher rates were driven by supply chain disruptions and resulting shortages, massive government spending to combat the impact of Covid-19, and the Fed printing lots of money to do the same.
Since the central bank stopped raising interest rates in July 2023, interest rates have fluctuated and eventually moved higher. The yield on the 10-year Treasury note was 4.48% on Monday.
Low inflation and economic growth
Now, inflation and economic growth are slowing, so the question for investors is when the Fed will start cutting interest rates. The economy expanded at a modest 1.4% annual rate in the first quarter.
The central bank’s preferred inflation measure, personal consumption expenditures, rose 2.6% in the 12 months through May, down from 2.7% in April. The Fed targets 2% inflation.
The Fed is looking closely at core personal consumption expenditures, which exclude food and energy. That measure has risen 2.6% over the past 12 months, the smallest advance since March 2021, and down from 2.8% in April.
Related: Former Treasury Official Reveals Surprising Predictions About Interest Rates
All of this data is leading experts to expect the Fed to start cutting interest rates this year. Interest rate futures indicate a 63% chance that the Fed will cut rates at least once by September, and a 61% chance that it will cut rates at least twice by the end of the year.
The effects of price fluctuations on you as a consumer are mixed. Higher prices mean higher payments on your bank accounts, certificates of deposit, and money market funds.
But you’re also paying more for your mortgage, your car loan, your credit card loan, your personal loan, and your student loan. And lower rates mean the exact opposite in all of these areas.
Morgan Stanley and the Trump Effect
So what does Trump mean for interest rates? Morgan Stanley strategists say it will likely mean lower short-term rates and higher long-term rates. This is known as a rising yield curve.
“The sharp shift in the odds in President Trump’s favor may be a unique catalyst that makes steep curves attractive,” they wrote in a commentary. Quoted from BloombergThey were pointing to trades that might benefit from a steepening yield curve.
Related: Wall Street Analyst Reveals Stunning Prediction About the Economy
Examples include buying short-term bonds and selling long-term bonds.
Slower economic growth under Trump would push short-term interest rates lower, as investors expect the Federal Reserve to cut rates to combat the slowdown. Long-term interest rates would also rise as inflation rises.
Potential impact of deportation and higher tariffs
Trump’s promise to keep out new immigrants and expel many who are already here could hurt the economy, Morgan Stanley analysts said, because their presence helped employers find the workers they needed, giving the economy a boost.
His pledge to raise tariffs could also hurt the economy by making it more expensive for manufacturers to produce his goods.
High tariffs also lead to inflation, because they push up the prices of the goods subject to the tariffs. This can lead to higher interest rates in the long run.
More economic analysis:
- The record high in stocks may be due to the fumes.
- Consumers head for the drain amid persistent inflation and slowing labor market
- Fed rate cut timing shifts after retail sales data
Strategists said that increased deficit spending could also lead to higher long-term interest rates. A larger deficit means the government has to issue more long-term bonds to finance it. That puts upward pressure on long-term interest rates.
So interest rates could go up significantly if Trump wins.
Related: Veteran Fund Manager Picks His Favorite Stocks for 2024
