Trump Influences Interest Rates Ahead of 2024 Election

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Financial markets typically begin pricing in potential election outcomes just a month or two before Election Day. However, this year investors are getting an early start.

Since June 27, the interest rate on 10-year Treasury securities has risen by about 10 basis points. While this may seem minor, it reverses the recent downward trend driven by mild inflation data and hopes for interest rate cuts. What changed around June 27? The first presidential debate between President Joe Biden and former President Donald Trump took place, and Biden’s poor performance appears to have shifted the election outlook significantly.

Debate Impact on Markets

Biden’s faltering debate performance quickly altered the election landscape, raising the chances of a Trump victory and a potential GOP sweep of both houses of Congress. Markets are sensitive to this because a president needs a supportive Congress to fully implement his agenda.

“This is all about bond investors beginning to price in the possibility that not only will Donald Trump emerge victorious but that the GOP will take the House and Senate too,” economist David Rosenberg of Rosenberg Research noted in a July 3 analysis. “Investors are sniffing something out here, which is GOP control of Congress.”

Trump’s Economic Policies and Market Reactions

As a real estate developer who once called himself the “king of debt,” Trump prefers the lowest rates possible. However, Wall Street believes Trump’s potential second-term policies might push rates up. Key reasons include his desire to impose new tariffs on imports, which would raise prices and contribute to inflation, and his plans to cut corporate tax rates and extend individual tax cuts, which would increase federal borrowing.

In 2022, the Federal Reserve rapidly raised short-term rates to combat inflation, which peaked at 9%. With inflation now at 3.3%, the Fed could begin cutting rates by fall if the trend continues. However, “Trumpflation” could halt these rate cuts. The Fed might postpone rate cuts on the prospect of a Trump win in November, and if Trump’s policies materialize, they might even have to raise rates.

Federal Deficit Concerns

Trump’s plan to cut the corporate tax rate by another percentage point and extend individual tax cuts set to expire at the end of 2025 would force the Treasury to borrow more than current forecasts, exacerbating the federal deficit. Recent Treasury auctions have already shown signs of strain due to the volume of federal debt on the market. Issuing more debt could trigger a debt crisis, forcing rates up to attract buyers.

Market Movements Post-Debate

The rise in the 10-year rate following the June 27 debate was more pronounced until Fed Chair Jerome Powell made optimistic remarks about the inflation outlook on July 2, which brought long-term rates down slightly and renewed hopes for a rate cut in September. Nevertheless, a “Trump premium” remains on rates. The total run-up before Powell’s remarks was about 20 basis points, indicating that markets are pushing long-term rates higher based on the odds of a Republican sweep.

If Trump wins and rates rise as expected, it could place Trump in a challenging position from Day One. Trump has a history of criticizing the Fed and its chair, Jerome Powell, for not lowering rates enough. During his first term, he argued there was little risk of inflation, so rates should be lower. However, inflationary pressures are stronger now, driven by global factors, and this won’t change if Biden leaves office. If Trump manages to push the Fed into lowering rates, the result could be higher inflation and voter dissatisfaction similar to what Biden has faced.

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