Two days after the U.S. presidential election, the Federal Reserve announced another cut in overnight Fed Funds, this time 25 basis points (.25 percent). This comes after the Fed announced a 50-basis point cut to its benchmark interest rate in mid-September, the first cut in four years. What does it all mean for Orion’s broker’s clients, or the population in general? Does the fact that the Fed is cutting rates mean it thinks that the U.S. economy is slowing down?

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The actions of the Federal Reserve’s Open Market Committee come despite strong employment numbers and inflation trending down to Fed target rates. But Orion’s experienced brokers know that it may not mean much in a tough housing market with low inventory, high insurance costs, and somewhat high mortgage rates. Unfortunately, potential borrowers or those thinking about refinancing will not feel needed relief. Rates jumped after the election results, and given President-elect Trump’s campaign promises, the cost of borrowing is likely to remain higher for longer. Higher mortgage rates will also reduce the number of homes sold. 

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Brokers know that interest rates, measured by yields, have been going up for a few months because the tariffs promised by Trump are inflationary. The sizable jump in yields after the election results became clear is driven by concerns that Trump policies, including tax cuts, tariffs, and deficit spending will push inflation back up.

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Stocks soared to record highs last week after the election news, however, helping everyone with a stock portfolio. But the yield on 10-year Treasury bonds rose to 4.479%, a four-month high. A higher bond yield means a declining bond market: Bond prices fall as yields rise. Trump campaigned on a promise to keep taxes low. He also proposed sweeping tariffs on imported goods. Economists predict a widening deficit in Trump presidency: plans to preserve and extend tax cuts will widen the federal budget deficit, which stands at $1.8 trillion. Tariffs, meanwhile, could reignite inflation, which the Federal Reserve has battled to keep down.

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But the Federal Reserve cut interest rates on Thursday, trimming the benchmark federal funds rate by a quarter point. The cut was widely forecast and, in any case, the Fed's interest rate decisions matter more for the short-term bond market. Mortgage rates tend to move more in sync with long-term bond yields, and those are rising because many investors expect that the federal government under Trump will maintain high deficit spending.

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Many forecasters expect Trump and a Republican-led Congress to renew the 2017 Tax Cuts and Jobs Act, which trimmed tax rates across the board and fed the federal deficit during Trump’s first term. Bond traders expect the deficit to rise again under Trump, with the United States living beyond our means. And that is not good for the country or for borrowers.

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