As a real estate professional, one can clearly understand why President Trump wants to lower interest rates. Every deal he ever looks at, hinges on the underwriting of the property(ies) which is directly related to the prevailing mortgage rates currently being offered by banks.. A lower mortgage rate lowers the overall costs when purchasing and managing a property, elevating profits. Trump craves a lower interest rate at all costs, without assessing its unintended consequences. The mortgage rate fluctuates based on many factors, but primarily the 10 year treasury bond which is set by market forces and NOT by the government. The misconception is that the government sets your mortgage rate or the rate on your car loan, but in fact it is set by market forces.
The government through its mandate of the Federal Reserve sets the federal funds rate which is an overnight rate, a very short term rate. Compare a ten year interest rate to an overnight rate. The risk profile of lending money overnight versus lending money for 10 years is vastly different. Consider inflation risks. When lending money overnight, inflation is a nonfactor since there would not be any erosion of the principle due to overnight inflation. OTOH, over a ten year period, inflation could considerably erode the value of the principle and therefore a ten year yield must incorporate that risk when it is being traded. So if there is a perceived risk of future inflation, the longer term interest rate would have to be higher to incorporate the risk of principle erosion.
The administration desires a lower consumer borrowing rate in the belief that this will spur economic activity and boost the overall economy. Recent actions to lower the short term rate by the Fed and encouraged by the president has not lowered the 10 year rate and thus has had minimal effects on mortgage rates. This is due to the fact that lower rates promote inflationary fears thus negating the effects on the longer term bond. What it has done is to significantly hurt savers.
Many savers have their money in short term instruments most notably money markets. The interest received in money markets is tightly related to the short term interest rate set by the Fed and every lowering of the rate by the fed decreases interest received to savers. This lowers spendable dollars which is a negative for the economy, the exact opposite of what was supposed to happen.
There is estimated to be 8 trillion dollars in money market funds and somewhere in the area of 7 trillion in short term treasury bills and 11 trillion dollars in savings and checking accounts. The interest received on these short term savings vehicles, totaling more than 26 trillion dollars, are directly tied to the short term rate set by the Fed and every lowering of interest rate by 25 basis points lowers the interest received by tens of billions of dollars.
So what is occurring is, savers are penalized to the tune of tens of billions of dollars which effectively lowers spending in the economy, while borrowers get no real help with lower borrowing rates.
If someone is losing, there must be a winner in this so who wins in this situation? As the difference, or the spread between the short term lending rate and the 10 year rate has been widening, (the Fed lowers the short term rates but the market forces do not lower the 10 yr rate, also known as a steepening yield curve), the clear winners are the banks . They are able to borrow money at a low rate and then lend it out long term at higher rates. This difference generated is the profit earned by banks and the greater the spread between short and long term rates, the greater the profits at banks. In a more extreme example, for those who have savings accounts in banks earning 0.4-0.6%, you are lending money to banks essentially for free and they are lending your money out at 6+% for the average mortgage rate. What a business!!
Every action has unintended consequences and the government has to consider the effects of its actions on savers and their contribution to the economy. There must be a balance between what the administration thinks it is doing to help spur the economy by lowering short term rates and its effects on people who rely on their savings, as well as those who are trying to save for a nest egg. By lowering short term rates, inflation perceptions grow, leading to higher long term rates, the exact opposite of the intended action. At this time, lowering the fed funds rate does little to help borrowers, but only pumps up bank's earnings while severely impacting savers.
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