What Happens To Rates During Election Years?

By Jay Voorhees

July 22, 2020 3 min read

What Happens To Rates During Election Years?

People are standing in a polling booth to vote on the presidential election. Election years don't always bring interest rates down.

I received this in an email on Monday: “Do you think the presidential election will have a big impact on rates if one side is elected over the other? I would imagine if Trump is re-elected rates will stay low for the next year or two in an attempt to bolster the economy.”

PRESIDENT CAN’T CONTROL RATES/RATES UP AFTER 2016 ELECTION

I loved the above comments b/c they made for a perfect blog topic.

In 2016 after Trump was elected, mortgage interest rates shot up 1/2 percent!

This surprised everyone b/c there were so many predictions of economic doom under a Trump Presidency.

Even more interesting though was that higher rates were exactly what Mr. Trump did NOT want, as Trump clearly believes lower rates are good for the economy.

Even if Mr. Trump was inaugurated the day after his election, he still could not have prevented rates from going up.

This is b/c the market is usually the primary influence over rates, no matter what the Fed or the President want.

WHY DID RATES GO UP AFTER TRUMP’S ELECTION?

Rates went up after Trump’s election b/c the markets perceived his potential policies as good for economic growth.

These policies included potential tax cuts and deregulation.

I want to emphasize here that I am not commenting on whether or not the markets were correct; I am only commenting on perceptions.

SO IS TRUMP OR BIDEN BETTER FOR RATES?

Nobody knows for sure, but what is known is that what is typically good for the economy is usually bad for rates.

Here are a few things that the markets will observe:

Government Spending. This is seen as good for economic growth by most observers and something that will increase rates. Both candidates spend like drunken sailors, but it appears that Biden still has the edge here. So the markets might perceive that a Trump victory is better for rates when it comes to this category.
Regulations. The markets perceive less regulation as good for economic growth. B/c Biden seems to be more in favor of regulations, a Biden victory is probably better for rates when it comes to this category.
Tax Cuts/Increases. Tax increases are generally perceived as bad for economic growth – at least in the short run. B/c Biden is generally in favor of more taxes than Trump, a Biden victory is probably better for rates when it comes to this category.
COVID-19 News. Some observers believe the COVID-19 coverage will become somewhat more positive if Biden is elected. B/c good COVID-19 news is very good for the economy, this will have the effect of increasing rates. So a Trump victory is probably better for rates when it comes to this category.
Inflation. Inflation is somewhat of a paradox b/c it is both bad for the economy and for rates. I am not sure which President has the edge here, as gov’t spending and borrowing seem to be out of control, making inflation all but inevitable at some point.

Net/net, I suspect that rates will be higher if Trump is elected – but only time will tell.