In the age of information overload, I think it’s extremely important to hitch our wagons to the closest gauge of reality. The problem is of course, reality is in the eye of the beholder. It’s why the markets have become so volatile…swirling narratives, emotionally fueled forums, opinions, opinions, opinions…it can obviously be overwhelming. So where does that leave us? I strongly feel we must be able to educate ourselves to stand firm in our own assessment on what realities form our truth. You don’t have to have a PHD in economics, but simply arming ourselves with the right data is the best place to start.
Today I want to cover the primary conversations being made in our markets and thusly impacting our interest rates. I give you: The Four T’s Deciding our Fate : Trump, Tariffs, Tax Cuts, and Transport of Undocumented Immigrants – The information below is broken into these four categories with points and counter points that are seen to be drivers of inflation:
Trump
I want to first acknowledge that the impeding Trump administration is evolving daily. Announcements over his cabinet members has begun to make headlines and even though he doesn’t take office officially until January, it hasn’t stopped the markets from pricing in their perspectives of what impacts will play out in our economy. What’s important to understand that the repricing we saw leading up to his presidential victory is all based on speculation of the inflationary pressures to come. Whether any of it comes to fruition will be yet to be seen.
- Higher Inflation: Policy impacts lead to higher spending = higher inflation = Fed stalls cuts = Higher Mortgage Rates
- Lower Inflation: Policy impacts lead to less government spending = lower inflation = lower deficit + advocation for lower borrowing rates = Lower Mortgage Rates
Tariffs
The point of imposing tariffs on imported goods is intended to make foreign products more expensive, thereby encouraging consumers to buy domestically produced goods. It’s also shown to reduce trade deficits, create jobs, less dependent of foreign countries, and leverage trade negotiations.
- Higher Inflation: The potential inflationary consequence is that by doing so it could lead to higher prices for consumers, retaliatory measures from other countries, and impact overall global trade dynamics.
- Lower Inflation: While tariffs can increase the cost of imported goods, they can also encourage domestic production, which might stabilize prices in the long run. By boosting local industries, tariffs can reduce dependency on volatile international markets and supply chains, potentially leading to more stable prices. Additionally, the impact of tariffs on overall inflation can be minimal compared to other factors like supply chain disruptions or global economic conditions.
Tax Cuts
Trump’s purpose in cutting taxes is to stimulate economic growth, increase competitiveness, simplify the tax code, boost disposable income, and encourage investment.
- Higher Inflation: Boosting people’s disposable income could lead to higher spending, increasing demand and thus causing prices of goods and services to go higher. It could also lead to larger budget deficits due to less government revenue which could cause more government borrowing. Also, business costs tend to go up to pressures on wages to be raised to keep up with cost of living. This could be pass down to consumer level, increasing prices, causing inflation.
- Lower Inflation: Although tax cuts can indeed increase disposable income, they can also lead to increased savings and investments rather than just consumption. This can spur economic growth without necessarily causing inflation. Moreover, if tax cuts are targeted towards businesses, they can lead to increased capital investment, productivity, and supply, which can offset inflationary pressures by increasing the economy’s capacity to produce goods and services.
Transport of Undocumented Immigrants
Trump’s reasoning behind proposed polices surrounding illegal deportation involves national security, economic impact involving opening jobs for American citizens, reducing flow of illegal drugs, and overall upholding of law enforcement at the border.
- Higher Inflation: Mass deportation could lead to labor shortages which could drive up wages due to a smaller pool of workers. This could also create supply chain disruptions and increase in overall operational costs for the reduced workforce. This all could increase inflationary pressures.
- Lower Inflation: By decreasing the number of undocumented immigrants, cost of spending on public services (healthcare, education, welfare) could lead to a lower fiscal deficit. Enhanced boarder security to stifle influx of illegal drugs has a significant social and economic impact. This would help reduce costs currently going to such efforts. Focus on legal immigration would make for a more efficient labor market helping improve overall controls on inflationary landscape.
As mentioned above, there is a lot of debate on these topics and even more that has yet to be decided. My hope is with a better understanding, we can be prepared to assess their impeding impacts, depending on what ends up coming to fruition.
For informational purposes only, not intended as financial advice. Please consult a financial professional for advice on your specific situation.
About the Author
Andrew Stringer, PrimeLending Executive Vice President, Sr. Director Capital Markets
Andrew brings a customer-focused and solution-oriented approach to leading our capital markets division, the team responsible for managing our interest rate risk, and ensuring we have the best execution strategy possible. He began his Capital Markets career at PrimeLending 10 years ago, left to broaden his experience at various other mortgage lenders, and rejoined the company in his current role in 2023. Andrew returned to a home that shares his belief in valuing people, operating with integrity, and pursuing excellence. A graduate of The University of Texas at Dallas, he calls on his background as an Eagle Scout to solve complex challenges and was recognized with a 2024 HousingWire Finance Leader award.
