Trump’s Potential Election Win Influences Interest Rates

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Financial markets usually start anticipating election outcomes a couple of months before Election Day. However, this year, that anticipation is happening much earlier.

Since June 27, the interest rate on 10-year Treasury securities has gone up by about 10 basis points. While this might not seem like much, it reverses a recent trend of interest rates going down because of mild inflation and hopes for rate cuts. What changed around June 27? The first presidential debate between President Joe Biden and former President Donald Trump took place, and Biden’s poor performance appears to have significantly altered the election outlook.

Debate Impact on Markets

Biden’s weak performance in the debate quickly changed how people view the election, increasing the chances of a Trump victory and a possible Republican takeover of both houses of Congress. This is important for markets because a president needs a supportive Congress to get their plans enacted.

“This is all about bond investors starting to factor in the possibility that not only will Donald Trump win, but that the GOP will also take the House and Senate,” noted economist David Rosenberg of Rosenberg Research in a July 3 analysis. “Investors are sensing something here, which is GOP control of Congress.”

Trump’s Economic Policies and Market Reactions

As a real estate developer who once called himself the “king of debt,” Trump prefers low interest rates. However, Wall Street believes that Trump’s potential second-term policies could push interest rates up. Some key reasons include his desire to impose new tariffs on imports, which would increase prices and contribute to inflation. Trump also plans to cut corporate tax rates and extend individual tax cuts, which would increase federal borrowing.

In 2022, the Federal Reserve rapidly increased short-term interest rates to fight inflation, which peaked at 9%. With inflation now at 3.3%, the Fed could start lowering rates by fall if the trend continues. However, “Trumpflation” could stop these rate cuts. The Fed might postpone rate cuts if Trump wins in November, and if Trump’s policies are implemented, they might even have to raise rates.

Federal Deficit Concerns

Trump’s plan to cut the corporate tax rate by another percentage point and extend individual tax cuts set to expire at the end of 2025 would force the Treasury to borrow more than currently predicted, making the federal deficit even bigger. Recent Treasury auctions have already shown signs of strain due to the amount of federal debt in the market. Issuing more debt could lead to a debt crisis, forcing interest rates up to attract buyers.

Market Movements Post-Debate

The increase in the 10-year rate following the June 27 debate was more pronounced until Fed Chair Jerome Powell made positive comments about the inflation outlook on July 2, which slightly lowered long-term rates and renewed hopes for a rate cut in September. Still, a “Trump premium” remains on rates. The total increase before Powell’s remarks was about 20 basis points, indicating that markets are pushing long-term rates higher based on the likelihood of a Republican sweep.

If Trump wins and rates go up as expected, it could put Trump in a difficult position right from the start. Trump has a history of criticizing the Fed and its chair, Jerome Powell, for not lowering rates enough. During his first term, he argued that there was little risk of inflation, so rates should be lower. However, inflationary pressures are stronger now, driven by global factors, and this won’t change if Biden leaves office. If Trump manages to push the Fed into lowering rates, the result could be higher inflation and voter dissatisfaction similar to what Biden has faced.

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