Former President Trump has taken an unprecedented approach to stimulating the economy by directly addressing housing and consumer credit costs, effectively sidestepping the Federal Reserve's conventional mechanisms. This move comes at a time when, despite the Fed's efforts to reduce interest rates, the gap between the 30-year fixed mortgage rate and the federal funds rate, as well as credit card interest rate spreads, have paradoxically expanded. Trump's interventions, including directives to government-sponsored enterprises like Fannie Mae and Freddie Mac to acquire mortgage bonds, and proposals for a cap on credit card interest rates, signal a shift towards executive-led financial policy, drawing parallels to historical instances of yield curve control.
The current economic landscape presents a curious dichotomy: while the Federal Reserve has implemented multiple rate reductions since August of the previous year, the financial benefits have not fully trickled down to consumers. Specifically, the spread on 30-year fixed mortgages has broadened to 255 basis points, and credit card rates have soared to over 22%, exacerbating financial burdens on households. This disconnect prompted the former President to intervene directly, aiming to provide immediate relief to Americans grappling with high borrowing costs.
A notable aspect of this intervention is the directive for Fannie Mae and Freddie Mac to buy mortgage bonds. This action is designed to inject liquidity into the mortgage market, thereby lowering interest rates for homebuyers. Early indications suggest some success, with the 30-year fixed mortgage rate reportedly dropping to 6%. This contrasts sharply with the limited impact of the Fed's previous rate cuts on these consumer-facing interest rates, highlighting a perceived inadequacy of traditional monetary policy tools in the current environment.
Furthermore, the proposal to cap credit card interest rates at 10% represents another significant departure from conventional economic management. If enacted, this cap would dramatically reduce credit card spreads, potentially to their lowest levels in modern history. Such a measure would directly ease the financial strain on millions of consumers, making everyday credit more affordable and potentially boosting consumer spending. This strategy underscores a belief that direct executive action can be more effective than indirect monetary policy in addressing specific market failures or consumer hardships.
The implications of these actions are far-reaching. By directly influencing interest rates for mortgages and credit cards, the executive branch is, in essence, implementing a form of yield curve control, albeit focused on consumer credit rather than government bonds. This mirrors certain financial interventions seen in the 1940s, where direct government influence was used to manage economic conditions. This approach raises questions about the division of labor between fiscal and monetary policy, and whether such direct interventions could become a more common feature of economic management in times of perceived crisis or market inefficiency.
The former President's strategy represents a distinct shift towards direct governmental intervention in consumer credit markets, aiming to provide immediate relief to borrowers. This contrasts with the Federal Reserve's more traditional, indirect monetary policy, whose effectiveness in influencing consumer-level interest rates has been limited in recent times. These direct actions, particularly the focus on reducing mortgage and credit card rates, highlight a proactive stance to alleviate financial pressures on households, reminiscent of past periods of economic control.