Trump's Tariffs, Souffles and Mortgage Rates
Well, there is no such thing as a Monday Morning Forecaster. Weathermen don’t get to forecast yesterday’s storm. But they do get to say whether they got the forecast right or not. So, far – I’ve gotten everything on point, but we still have a tricky path ahead.
As you know, on April 2nd (after the market closed), Donald Trump announced a new set of sweeping tariffs. (He famously said he didn’t want to make the announcement on April 1st for fear that other countries would, well, call him foolish.)
Some say the goal is to encourage more domestic manufacturing by making foreign products more expensive. Others think it’s a “game of chicken” with other countries to push them into removing their own tariffs. These new tariffs include a 10% baseline tax on all imports, with even steeper rates—34% on goods from China and 20% on European Union products. That afternoon, I posted on my LinkedIn blog exactly (at least so far), what was going to happen to rates. So how do these tariffs impact mortgage rates?
I don’t think I need to explain what tariffs are. At this point, I feel like we all have a pretty good handle on it. In the short term, it appears that investors are pulling money out of the stock market, causing stock prices to fall. That money has and will likely continue to flow into safer assets like the bonds market (this includes the mortgage-backed securities market).
Why are institutions fleeing the stock market (at least temporarily)? The cost of goods is about to rise, and no one knows exactly how American consumers will react. Will tariffs cause additional inflation? Will the strategy work? What about employment? Markets hate uncertainty – they have the same questions like you and I do. When answers are unclear, risk increases. And to eliminate risk, in the wise words of Kenny Rogers, “you gotta know when to walk away.” That’s what investors seem to be doing with stocks right now.
What this could mean for the Treasury and mortgage-backed securities market is that as funds move into bonds, demand for them rises. When demand rises, rates of return that are offered to investors on said bonds can be lowered. Lower rates of return on Treasury bonds have so far meant lower mortgage rates for borrowers. In the last 36 hours we’ve seen rates drop about .0375% on a 30 year fixed rate mortgage across the board. We’ll have a better idea in the coming weeks if rates continue to fall, or if they will level off and return to where they were (more on that in a sec).
But there’s another side to this equation: long-term tariff effects usually lead to inflation.
When inflation rises, the Federal Reserve typically steps in to keep it under control. Their primary tool? Raising the Federal Funds rate, which makes borrowing money more expensive. Higher interest rates slow down spending and stabilize prices, but they also drive up borrowing costs—including mortgage rates. We won’t know how the Fed views all this until their next meeting in early May.
In the interim, this could create a short window of opportunity from now to late April where we might see lower mortgage rates—if and only enough money flows into the bond market AND the Federal Reserve’s opinion on this remains unknown until the May meeting. I might be having a busy late April mini refinance surge with clients.
A Potential Economic Slowdown?
Some economists worry that these tariffs could lead to stagflation—a mix of slow economic growth and high inflation. If that happens, the Fed would have to balance controlling inflation with avoiding a recession. That uncertainty will likely be a key topic at their next meeting. If stagflation (or a recession) is starting to formulate a storm on the horizon, I’ll talk about how that will affect mortgage rates at that time. Right now though, most big wig economists put those chances of it ringing true in the next 12 months at less than 40%. If probability rises to above a 50/50 chance I’ll dive in, in future articles.
The Bottom Line
If you’re considering buying a home or refinancing, these new tariffs are worth paying attention to. It affects everything from the cost of new construction (think Canadian lumber) to your stock portfolio to mortgage rates.
I was at a meeting today where we discussed Trump’s policies. Love him or hate him (there doesn’t seem to be a ‘neutral’ opinion about the guy, he’s in "cracking eggs" mode—hoping to make a soufflé down the road. But it’s way too early to tell if these egg whites will help his strategy rise… or if the whole thing will collapse while baking in the oven.
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