Will The Election Impact Mortgage Interest Rates?

Last month, the Federal Reserve cut their rate by a whole point. It was the largest rate cut in over 18 months.

This happened shortly before the upcoming presidential election. This leaves some questions unanswered.

What does this mean for the housing market? Does the rate cut mean the economy is getting better? Is inflation improving? Or was this just another political move?

Let’s start with the basics.

How Are Interest Rates Determined?

Interest rates can encompass everything from the short-term federal fund rate to maturities of 30 years or more. The interest rate is the part of a mortgage that gets the most attention of real estate buyers and investors because it’s the biggest cost of financing real estate.

Government policy, consumer habits, and the Federal Reserve, aka “the Fed”, can all have an impact on interest rates. But it’s important to know the Fed does NOT actually set mortgage rates—their actions influence them.

The Fed sets the federal fund rates, which influence many financial products, including mortgage rates.  Other factors like inflation and the price of US treasuries also influence the mortgage interest rates across the country.

What Impact Does The President Have On Interest Rates?

 

Does the president have any influence on interest rates? Should we be worried with the upcoming election?

The central bank is an independent federal agency, that sets the federal fund rate, or what most people call, interest rates. The central bank has two main goals: to maximize employment and stabilize prices.

The Federal Reserve Board of Governors are made up of the seven members, who are appointed by the president and confirmed by the Senate for 14-year terms. A new board member is appointed every two years. The president can remove the Federal Chair, but only for a good reason.

Of course, housing and monetary policies proposed by the president, if taken up by congress and enacted into law, can affect the housing market, which can have an indirect influence on interest rates.

So, it’s safe to say the president doesn’t have too much influence on the Federal Reserve or mortgage interest rates—at least not directly.

Have Previous Elections Impacted Mortgage Interest Rates?

Since 1972, the Fed has changed interest rates in every presidential election except two (2012 and 2016). The rate has increased in five election years and been lowered in six.

Some years the rates changed more dramatically than others: in 1980, the Fed increased the rates by 1%, then reduced them by 5.5% between February and July when the economy faced recession but continued to increase them between August and November as it battled double-digit inflation.

Usually, the changes in the rates were part of cycles that the Fed had set in motion a year or more before an election year. For example, in 1992, the Fed stopped making rate cuts that it started in the 1990-1991 recession. 

Recently, the Fed raised rates when inflation was too high, like in 2022 and 2023, and lowered them when the country was faced with a threat of economic strain (in early 2020 during COVID-19 lockdowns).

How Could This Year’s Presidential Election Impact Mortgage Interest Rates?

Just one month ago, the Fed lowered the federal funds rate in from between 5.25% to 5.50% down to 4.75% to 5.00%, a 50-basis point (0.50%) reduction.

The rate cut, which was the first rate cut since March 2020, came less than 7 weeks before the November 5 election.

The Fed has been trying to keep inflation down--within a 2% to 3% range. Since inflation has stopped rising so quickly, and the Fed finally has it more under control, we should see interest rates lowering in 2025.

It’s hard to say what the Fed’s rate changes were based on in previous elections. Whether they were responding to a recession, following a forged path, or making adjustments based on current economic changes, it looks like it has always tried to push its main goals of maximizing employment and stabilizing prices.

Based on historical data, there’s not enough information to say that this election will actually have an impact on mortgage interest rates.

While the 2024 election has been eventful, economic growth and inflation expectations will have a bigger impact on interest rates. As economic growth stabilizes and as inflation continues to move closer to 2%, we can see rates continue to have a downward trend through the end of 2024 and into 2025.