How Will Trump’s Policies Affect Interest Rates?

With Donald Trump set to move back into the White House in January 2025, homeowners and potential buyers have a big question on their minds.

How will his policies affect interest rates?

While there’s no way of knowing exactly how things will play out, we have two things to help guide our projection:

• Trump’s proposed policies
• Trump’s approach during his first four years in office

Before we get into the finer details, here’s a summary of what to expect.

Lower Energy Costs and Interest Rates

Trump plans to increase domestic drilling to lower energy costs. By making energy cheaper, he aims to reduce production and transportation expenses across industries. Lower costs could ease inflation, which often leads to reduced interest rates.

Energy policies also affect the costs of raw materials. Cheaper energy means less expensive processing, transportation, and storage for goods such as steel, lumber, and cement. 

For you, that translates to lower costs on homes, vehicles, and manufactured goods. When inflation eases, the Federal Reserve may feel less pressure to maintain high interest rates, creating more favorable borrowing conditions.

However, energy markets are often unpredictable. Geopolitical tensions or environmental concerns could delay the full effects of these policies. Such delays could keep inflation high in the short term, forcing the Federal Reserve to sustain elevated rates.

You could benefit directly from this shift through:

• Reduced energy costs lower prices for goods and services.
• Lower inflation encourages the Federal Reserve to hold or lower rates.
• Stable energy markets create predictable borrowing conditions.

But, if energy policies face hurdles, inflation may remain unpredictable. That uncertainty could push the Federal Reserve to keep rates higher for longer.

Trade Policies and Inflation

Trump’s tariffs aim to protect domestic industries, but they often raise the cost of imported goods. 

For example, higher prices on materials like steel and aluminum could drive inflation. In response, the Federal Reserve might raise interest rates to curb economic overheating.

Tariffs also create ripple effects beyond the initial costs. Businesses that rely heavily on imported goods, such as construction or manufacturing companies, may pass those costs onto consumers. 

As a result, you might see higher prices on everyday items, from cars to household appliances. This inflationary pressure can lead to rate hikes, making borrowing more expensive for individuals and businesses alike.

On the flip side, boosting domestic manufacturing could strengthen the economy. Expanding production within the U.S. may create jobs, reduce supply chain disruptions, and help stabilize prices in the long run. However, transitioning to a more self-sufficient economy takes time and could initially contribute to market volatility.

Trade policies may affect you through:

• Higher inflation from tariffs and increasing borrowing costs.
• Short-term uncertainty that slows down economic growth.
• Potential stabilization if domestic industries thrive and inflation levels off.

The impact depends on how quickly domestic production offsets tariff-related price hikes.

Government Spending and Debt

Trump’s plans for increased government spending, especially on infrastructure and defense, could stimulate economic growth. While this creates jobs and boosts GDP, it also adds to the national debt.

Higher debt levels often lead to inflation concerns. Borrowing by the government puts upward pressure on interest rates, as lenders demand higher returns for financing increased debt. You may feel this through costlier mortgages, car loans, and credit card rates. While spending can energize the economy, its benefits depend on whether the projects generate long-term value.

Trump has also emphasized tax cuts, which aim to put more money in your pocket. By increasing consumer spending, tax cuts can spur economic growth. However, they may also contribute to inflation if spending outpaces production. The Federal Reserve might raise rates to keep the economy from overheating.

Here’s how it could affect you:

• Increased debt might lead to higher rates, making loans more expensive.
• Balanced spending could encourage economic growth without sharp rate hikes.
• Tax cuts may boost consumer spending, further influencing rate trends.

The impact hinges on whether spending focuses on long-term economic benefits or adds excessive debt.

Immigration Policies and Labor Costs

Trump’s immigration restrictions could reduce the labor force in key industries like construction and agriculture. With fewer workers, companies may face higher labor costs as they compete for talent. This wage growth could contribute to inflation, prompting the Federal Reserve to raise interest rates.

Labor shortages can also lead to delays in major projects, such as infrastructure development or housing construction. You might notice this as increased costs for goods and services due to lower productivity. Rising wages are good for workers but can create inflationary cycles if they aren’t matched by productivity gains.

Alternatively, automation and domestic workforce development might offset labor shortages. Some industries may invest in technology to reduce dependence on human labor, while others may focus on training programs to develop a skilled domestic workforce. 

Note: these approaches can ease inflationary pressures, but they take time to implement.

These policies might influence you through:

• Higher wages leading to increased prices and higher borrowing costs.
• Slower economic activity if labor shortages persist.
• Opportunities for domestic workers if companies invest in training programs.

The effect depends on how well industries adapt to a shrinking immigrant workforce.

Federal Reserve Interactions and Monetary Policy

Trump has previously criticized the Federal Reserve for raising rates during his presidency. If re-elected, he may push for policies that favor lower rates to stimulate borrowing and investment. His appointments to the Federal Reserve could influence future decisions.

However, the Federal Reserve operates independently and prioritizes economic stability over political pressures. Aggressive fiscal policies from the administration could still lead the Fed to raise rates if inflation rises.

Trump’s emphasis on low rates may appeal to businesses and borrowers, but it also comes with risks. Prolonged periods of low rates can lead to asset bubbles, where prices in housing or stock markets rise unsustainably. If these bubbles burst, the Federal Reserve may have to implement sharp rate hikes, affecting you with sudden borrowing costs.

Here’s what you can expect:

• Pressure for lower rates may temporarily benefit borrowers.
• Independent Federal Reserve actions could counteract political influence.
• Long-term rate trends will depend on how inflation reacts to fiscal policies.

Trump’s relationship with the Federal Reserve adds another layer of complexity to interest rate predictions.

Broader Impacts and Economic Risks

Trump’s policies, from energy and trade to immigration and spending, are deeply interconnected. Lower energy costs and deregulation may ease inflation, but tariffs and labor shortages could create upward pressure on prices.

Economic risks include:

• Volatility from trade disputes or rapid policy changes.
• Inflation driven by higher wages or material costs.
• Uncertainty affecting borrowing, lending, and investment decisions.

If these policies succeed in boosting growth while controlling inflation, rates could stay steady or even drop. If not, you may face higher rates and increased borrowing costs.

Final Thoughts

Trump’s policies could influence interest rates in various ways, from reducing energy costs to increasing inflation through tariffs and labor challenges. The Federal Reserve will play a key role in balancing these factors to maintain economic stability.

Ultimately, the effect on interest rates depends on how these policies interact and whether they achieve their intended goals. As these changes unfold, staying informed will help you navigate borrowing and financial planning.