The Federal Reserve (Fed) is the central bank of the United States, responsible for keeping the monetary system running as well as possible. One of its most important tasks is to set the federal funds rate, which influences the cost of borrowing for individuals and businesses.
The Federal Reserve is an independent agency, not a political institution, so the president cannot control rates himself, although President Donald Trump is always pushing the envelope and has threatened to fire Federal Reserve Chairman Jerome Powell before his term ends next month.
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During a recent interview with Fox Business, Trump was asked if he thinks rates will be cut further this year, and he responded, “When Kevin comes in, I will.” Trump was referring to Kevin Warsh, his candidate to replace Powell. (The Senate confirms Federal Reserve chairs.) So, it’s clear that the president wants rates lowered. What if he gets his way?
The United States had a good run with extremely low interest rates. From March 2020 to February 2022, the federal funds rate remained at 0.25%. However, the rate was then steadily increased to help combat inflation and, by July 2023, it had jumped to 5.25%, a level where it remained until August 2024.
The interest rate is now in the target range of 3.5% to 3.75% (3.64% at the time of writing) after the Federal Reserve kept it unchanged at its last two meetings.
But what happens if Trump’s nominee arrives and the Federal Open Market Committee cuts interest rates? The real estate sector would be one of the main beneficiaries. When interest rates go down, mortgage rates do the same, making homeownership more affordable. The difference between paying 5% and 3% on a mortgage could easily be tens of thousands of dollars over time, which is why many people delay purchasing homes until rates are more favorable.
The same applies to the automotive industry, where lower rates mean cheaper car loans, which ideally leads to more sales for dealers and manufacturers.
Technology and growth stocks also tend to thrive at lower interest rates because many of their valuations are based on future earnings, which become more valuable at lower rates. Safer investments also become less attractive at lower rates, causing investors to return to the high-growth opportunities offered by the technology sector.
Low interest rates weren’t the main cause, but they surely helped fuel the tech sector’s enormous growth over the past decade, when they hovered just above 0% for much of the time.
