The US president does not set mortgage rates Loaner

Mortgage rates are a fairly complex subject.

They are also often misunderstood and oversimplified, and many myths are perpetuated by those working in the industry.

Some people think that when the Fed cuts rates, mortgage rates go down by the same amount.

Others might believe that the government sets rates one way or another and lenders then quote them accordingly.

The fact is, none of this is true. Ultimately, mortgage rates are set by the market, just like many other things you buy.

Does the president set mortgage rates?

The short answer is no.

When it comes to mortgage rates, there is a supply and demand dynamic, just like with other properties.

When it comes to mortgage pricing, it’s the appetite for mortgage-backed securities (MBS) that drives rates up or down.

Simply put, if investor demand increases, MBS prices rise and rates may fall.

If there isn’t much demand, MBS prices fall and rates must rise to support purchases.

All this indicates that it is the market which determines the direction of rates.

So where does the President of the United States fit into all this?

Well, one could argue that the president certainly plays an indirect role in changing rates because they are determined by the economy.

However, there is no direct order from President Biden or President Trump saying rates should be X so they go to X.

Instead, these presidents can set policies that directly affect the economy and thus indirectly affect interest rates.

Trump said he wants lower mortgage rates, but his policies could have the opposite effect

Some economists have recently expressed concern that some of President-elect Trump’s proposed policies could increase inflation.

Measures such as tariffs and tax cuts could prove inflationary and increase the prices of consumer goods.

This could also cause mortgage rates to rise, as inflation is not friendly to bonds.

At this point, a sitting (or in this case incoming) president could technically affect mortgage rates.

But again, this is more of an indirect effect.

Trump has made it clear that he wants mortgage rates to fall, despite the impact it could have on the already inventory-starved housing market.

We don’t really need more demand right now, we need more supply.

Stimulating demand by lowering rates would not necessarily be in the best interest of most people, namely renters.

Although it would help those who recently took out a home loan at a much higher rate, as they could significantly improve the rate and duration of the refinancing pencil.

It’s also important to note that what a president says and what he actually delivers are two very different things.

And promises are hard to keep when many outside forces and independent economic data determine policy.

Could a president take a more direct role on mortgage rates?

The caveat is that a president might become a bit more aggressive if he intervened directly with the Federal Reserve or reinstated a program like quantitative easing (QE).

We talked about Trump wants to set rates himself and/or replace Fed Chairman Jerome Powell.

In this regard, it could take a more direct approach to setting monetary policy and attempting to manipulate mortgage rates. But that might be unlikely.

A more realistic way to bring down mortgage rates would be through another round of QE, namely the government’s MBS purchase program, which has led to high demand for mortgages and much lower interest rates .

Arguably, a president could make the case for this, but he would still need strong support and arguments to do so.

But a direct order from the president to fix X percent over 30 years is simply not feasible.

The president has, at best, indirect power over mortgage rates

In summary, the simplest way to look at it is that the US president has an indirect influence on mortgage rates.

I will say that mortgage rates have increased significantly recently in anticipation of the new administration.

So there has been a lot of speculation about the possibility of Trump becoming the next president.

Which, again, is indirect, because Trump would actually want the opposite to happen.

But it shows the power of a president in terms of influence and expectations.

However, if you’re trying to track mortgage rates, it might be better to continue looking at economic data rather than throwing out weekly proposals.

Or the impending so-called trade wars, tax cuts, etc.

Ultimately, bond traders will continue to look primarily to economic data when making their decisions.

And if the data shows a weakening economy, it’s likely that mortgage rates will fall under a Trump presidency.

But if the economy shows strength or inflation appears to be reigniting due to the new administration’s policies, rates will likely rise.

The takeaway here is that no one sets mortgage rates, whether it’s the President of the United States (POTUS), the Chairman of the Federal Reserve, or the Secretary of the Treasury.

The free market determines mortgage rates, like anything else.

Continue reading: Does the Fed control mortgage rates?