The “smartest guys in the room” might be wrong with their forecasts. The era of very low rates came to an end in late 2021. But presidential administrations and agendas do make a difference. The Trump agenda began with a very vocal bang but packed less of a growth punch than some had imagined. If so, you would expect the same cautious approach to rate increases from the Fed. Or decreases should it come to that. The day after Donald Trump was elected, stocks rallied and bonds sold off/rates went up. Trump’s major tax cuts would tend to, it was believed, create a short-term boost in economic growth and higher interest rates. But Republican lawmakers who actually have to pass any changes to tax law, especially those in the Senate, were wary of tax cuts that would increase the budget deficit as much as Trump’s campaign plan would have.
Regarding infrastructure spending, Trump had been short on details, and the details matter a great deal for how much an infrastructure plan could lift growth. For example, tax credits that make the finances of building toll roads more favorable are less likely to create a huge boost in activity than spending on upgrading physical infrastructure outright. Then, as now, on both tax cuts and infrastructure there’s no guarantee that the actual scale of stimulus will every match postelection talk.
Recently, and in the future, even if the U.S. economy does start growing faster, any administration appointees could change their tune on the desirability of higher interest rates. Politicians, once in office, tend to learn that they like low interest rates, and during the Trump administration some pushed for cheaper money and the Fed attempting to hold the line to prevent inflation. We will see what happens with the remaining years of the Biden administration, although so far it seems to have kept its hands off of Fed direction.
Critics say that some elements of Trump’s economic policy wound up being a drag on growth, such as a trade war with China or Mexico, immigration restrictions that limit the supply of labor, or geopolitical disputes. This is still being played out to some extent.
For the past few administrations, presidents have stayed away from weighing in on monetary policy and let the Fed act independently. Trump had described himself as a “low interest rate person” but attacked Fed Chair Janet by name during the campaign. Biden has been letting the Federal Reserve handle things, for better or worse.
Looking ahead to 2023, even if the Fed kept its short-term interest rate targets high to combat elevated inflation levels, long-term interest rates, which are determined by the supply and demand of the bond market, may remain stable or actually drop. Trump didn’t feel bound by the traditions that have governed how recent presidents have acted, but Biden seems more predictable. The future of United States interest rate policy is always uncertain – like everything else in the future – but no one should be sure that long-term rates mortgage are destined to move dramatically higher if at all.
