Conservative 
Search
Trending
Current News
We support our Publishers and Content Creators. You can view this story on their website by CLICKING HERE.
Both in his first term and since the November election, Donald Trump has pointed to a rising stock market as an endorsement of his policies. He would be wise to keep his eyes focused on another key economic indicator.
As the Federal Reserve started a round of interest rate reductions, mortgage rates rose again over the past two months. Coming as those locked out of ultra-low rates during the Covid panic face serious obstacles to purchasing the home of their dreams, the development should emphasize to Trump and his team the importance of fiscal discipline in maintaining economic stability for American families.
Interest Rate Diversion
In mid-September, the Federal Reserve cut interest rates by half a percentage point. It followed that development with another quarter-point cut immediately after the November elections. One might think mortgage rates would decline in concert with the Fed’s actions, but the opposite happened. While the Fed cut rates by three-quarters of a percentage point, 30-year mortgage rates rose by the exact same amount, going from an average of 6.09 percent the week of Sept. 19 to 6.84 percent the week of Nov. 21.
The divergence comes because, while the Federal Reserve establishes short-term interest rates, mortgages are more closely associated with the rate on the 10-year Treasury note. And in recent weeks, bond traders have increased their worries about inflation and long-term budget deficits.
Bond Market Vigilantes?
It is of course difficult to divine a single factor behind the moves of myriad participants in a marketplace. And the rise in bond yields, and mortgage rates, occurred before the election — but began in October, as a Trump victory became more likely. So it’s not entirely unrealistic to wonder whether the nation’s fiscal situation has attracted the focus of the bond market.
Recall that the federal government has a structural deficit approaching $2 trillion per year, or over 6 percent of the country’s gross domestic product. Recall too that this sizable structural deficit — one of the largest ever run in peacetime — comes before Congress considers extensions of the Tax Cuts and Jobs Act, major portions of which expire at the end of 2025. Lawmakers seem unwilling to let go of the nation’s credit card, but at some point, bond market traders in the United States and elsewhere will start questioning the federal government’s ability to pay back all of this borrowing.
American Dream or American Nightmare?
Therein lies one of the best arguments for paying for tax relief via spending reductions and for cutting federal spending generally. Returning to fiscal responsibility will provide significant benefits to American families, via things like lower mortgage rates, while continued reckless spending by Washington could cripple the ability of the next generation to purchase their slice of the American dream.
Families who couldn’t capitalize on ultra-low interest rates during Covid face an uphill climb to buy their own home. House prices skyrocketed through the Covid years, and now most households are locked into their current mortgage. That is, because the Federal Reserve artificially lowered rates by quantitative easing (i.e., printing money) during the Covid panic, people don’t want to move houses and give up a 3 percent mortgage rate for a mortgage charging more than double that.
This “boom-and-bust” interest rate cycle sparked by the Federal Reserve — lowering rates through quantitative easing, only to have to raise them sharply when inflation reared its ugly head — has jeopardized housing affordability for those seeking to buy their first home. Higher rates will cost families hundreds, if not thousands, of additional dollars in interest payments every month.
Fiscal Responsibility Can Help Lower Rates
The solution to this quandary should not come via more market interventions by the Federal Reserve — enough of that already, please. Instead, lawmakers can help to lower long-term interest rates, the rates that affect mortgages, by getting the country’s fiscal house in order and lowering our structural deficit.
Washington has proven itself reluctant to act for far too long. But focusing on mortgage rates — how they have risen significantly in the past few years and how fiscal discipline could help to lower them — would provide a tangible benefit for American families and motivation for lawmakers to stick to their promises for once. The alternative, in the form of a bond market crash forcing Congress to make immediate budgetary cuts, would be too catastrophic to contemplate.
