It’s true the housing market has ground to a halt. And at some point, a lower base rate could improve the mortgage offers made to would-be buyers and kickstart activity in the sector.
“Could somebody please inform Jerome ‘Too Late’ Powell that he is hurting the housing industry, very badly?” the president wrote on Truth Social this week. “People can’t get a mortgage because of him. There is no Inflation, and every sign is pointing to a major Rate Cut. ‘Too Late’ is a disaster!”
The pressure is likely to increase as the weeks roll on, with the Fed’s next base rate meeting scheduled to happen in September—and possible hints to come at this week’s Jackson Hole Symposium.
Likewise, in July, he wrote: “Housing in our country is lagging because Jerome ‘Too Late’ Powell refuses to lower interest rates. Families are being hurt because interest rates are too high, and even our country is having to pay a higher rate than it should be because of ‘Too Late.’”
While Trump’s pressure on Powell hasn’t been popular with Wall Street, pitching the battle on behalf of consumers is more politically palatable. While Trump leads with the benefit to consumers, economists are focused on Trump’s point that the country is also paying more because of Powell’s refusal to capitulate to his demands.
This is what may be at the heart of the White House’s crusade against the current base rate, experts believe, because if the Federal Open Market Committee (FOMC) made borrowing cheaper for everyone, that would include the government.
The White House will be well aware of this fact, particularly in an environment where fiscally conservative Republicans will be shuddering at Uncle Sam’s $37 trillion (and growing) national debt.
Of course, Trump’s motivation can be twofold: He can want to foster economic activity, and conveniently bring down his own overheads as well.
“It’s both,” Professor Joao Gomes, of the Wharton Business School at the University of Pennsylvania, told Fortune in an exclusive interview. “I don’t know how to weigh those two … but the latter one is incredibly important. I think they’re very aware of this. The budget picture would look a lot better if interest rates were 2.5%, 2%, 1%—it would look very, very different.”
In 2024, the average rate of interest paid on U.S. borrowing was 3.32%. As of last month, it cost $1.013 trillion to maintain the borrowing, approximately 17% of federal spending for the fiscal year.
According to Treasury data seen by Fortune, the accrued interest expense on Treasury notes in July alone was $38.1 billion. Add to that $13.9 billion in interest on Treasury bonds, $2.85 billion on Treasury Floating Rate Notes (FRN) and a total of $6.1 billion across Treasury Inflation-Protected Securities (TIPS) assets. The bill is alarming: The total comes to $60.95 billion for the month.
Professor Gomes said bringing down those rates is “incredibly important”: “It might be more important than the impact it would have on growth.”
The mortgage question
President Trump’s implication that a lower base rate would kickstart the housing market isn’t a given, Columbia University’s Professor Yiming Ma told Fortune, but it could ease some tension for “locked-in” homeowners.
Mortgage rates are partly based on the country’s base rate, but over a much longer period of time than the Fed’s month-to-month alterations. This means a 0.25bps reduction is unlikely to make a significant difference, Professor Ma said. However, lenders may be looking at a potential cut as a sign of a regime change in monetary policy, signaling that future rates could continue to lower, meaningfully impacting the rates lenders can offer.
Mortgage offers take into consideration far more than the Fed, Professor Ma explained: “Banks will charge a premium, and that premium depends a lot on: How they think the economy is going, what is the likelihood of default, how bad is [the applicant’s] funding condition? That all is going to depend on a range of other things within the real economy. The connection between borrowing costs and the short-term interest rate is in theory there, but in practice it depends on so many things.”
“I think in particular the environment we’re in right now is one of pretty high uncertainty and even if you get a rate cut … there’s still a long way to go until the market will think that we’re going to have—for the longer term—lower Interest on accessories or policy rates, and there’s going to be a long way to go for people to think the economy is stable enough so that the premium on top of that rate is not going to go higher.”
Indeed, when the Fed cut rates last September by 50bps, the average 30-year mortgage rate actually increased per the St Louis Federal Reserve. “It seems that in this environment that the mortgage rates can zig even when the Fed zags,” Bankrate analyst Jeff Ostrowski told Fortune. “There’s not a clear connection between the Federal Reserve’s benchmark rate and mortgage rates.”
That being said, a lower base rate may signal to consumers that a lower rate environment is on the way. This, Ostrowski added, could relieve some of the lock-in effect where homeowners don’t want to move houses because their longer-term fixed mortgages are set at a rate offered in a previous period of lower interest. To see rates coming down could foster activity and encourage people to start looking at the market.
Would consumers benefit or not?
As well as releasing some tension in the housing market, there are some clear upsides for certain demographics when it comes to lower rates, added Professor Ma. There would be some “immediate relief” for people living “paycheck to paycheck” and relying on credit cards if rates lowered lightly (and especially if they continued to do so) the economist added.
According to a study from the St Louis Fed, approximately 27% of people in the bottom 10th percentile have a credit card and 40% of those in the second-to-bottom. In the third percentile, approximately 50% of people had credit cards they needed to pay off, representing a significant portion of the population.
But consumers aren’t necessarily savers or spenders: Many will benefit from a lower rate on the credit card side, but suffer on their savings side. The Fed reported this year that 59% of people had savings accounts and benefitted from returns at the higher rate.
“Financial institutions are actually very fast to pass on rate cuts to savings,” observed Professor Ma, with Ostrowski echoing: “I’ve got a high yield savings account and it’s like almost the second the Fed moves I get a notice saying ‘your rate just changed,’ so it seems like the variable rates will move pretty quickly.”
The net impact on consumers is a “wash” added Ostrowski: “I get the sense that Americans have shifted so much into storing what wealth they have in the stock market that … it doesn’t seem like we hear the same outcry from retirees when rates go down.”
“It’s hard to say that there’s a real winner or loser because most Americans are consumers and investors, they’re spenders and savers,” he added.
Why would the government benefit?
If the cost of borrowing is cheaper for everyone that doesn’t just mean businesses and consumers, it means the government too.
Typically, when interest rates are lower the same goes for Treasury yields (government debt and the interest it pays to lenders to service the debt).
That hasn’t always been the case, over the past year for example yields climbed when the base rate lowered. This was due to a range of factors, wrote JP Morgan, including growth, economic uncertainty and questions over whether the September 2024 cut would spell a change in the tide of monetary policy (spoiler alert: it wasn’t).
But generally, lower interest rates benefit the government’s bottom line because it can issue new debt at a lower premium to maintain the loan.
While it’s hard to assign a “weight” to whether Trump’s motivation is for voters or his administration, Professor Ma said “both can be true”. A lower base rate eases “borrowing for consumers, it’s going to ease pressure for companies to borrow, which will stimulate businesses and some of that will be evident in the stock market. These are all important economic indicators for any country—that’s definitely true.
“It’s also true that consumers and businesses are not the only ones to borrow … The U.S. government borrows a lot right now, and certainly the interest expense on the U.S. Treasury is going to be affected by by the interest rate.”
The expert also pointed out that the trickle-through of cheaper borrowing for the government may not be across the board: “We have Treasury bills that mature within the year, or three months, six months, 12-month horizons. We also have very long-term debts and so cutting interest rates in the overnight maturity is not going to directly pass through necessarily to the very long end.”
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