The president-elect's social media post sparked inflation fears – but a rate spike doesn't appear imminent
A threat last week by president-elect Donald Trump to impose 25% tariffs on all goods entering the US from Canada and Mexico – and further levies on China – sparked a flurry of fresh debate about how his incoming administration’s approach could impact the US economy.
Some economists view the proposed tariffs as potentially inflationary, raising the prospect of an about-turn in the Federal Reserve’s current interest rate-cutting approach and new uncertainty in the bond market.
But with plenty of time remaining before his inauguration on January 20, little clarity has emerged on whether Trump intends to push ahead with the measure or if it’s merely an effort to spur Mexican and Canadian authorities into action on cross-border movement of people and illegal drug trafficking.
That means it’s premature to speculate whether tariffs could drive a potential uptick in mortgage rates in early 2025 – and whether they’ll even come to pass, according to a mortgage industry executive.
Anthony Casa (pictured top), president and chief executive officer of UMortgage, told Mortgage Professional America that while he saw a good chance of further tariffs on China, the threatened measures against Canada could represent something of a “bargaining chip” as a prelude to trade negotiations during the Trump presidency.
“Canada is obviously a key import and export partner. Realistically, I don’t expect [tariffs] to have as big of an impact on rates as has been cited,” Casa said. “It’s more of a negotiating situation, so I don’t expect it to have a substantial [effect] on interest rates.
“I think whatever the short-term reaction is based upon, the speculation will wear off and as the Federal Reserve’s policy continues to lean towards lowering rates, I think we’ll see the rate trajectory decrease substantially.”
US president-elect Donald Trump has issued a bombshell warning to impose a 25% tariff on all products entering the country from Canada and Mexico starting on the first day of his new administration.https://t.co/5PCWZeELRr
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 26, 2024
#TradePolicy #USCanadaRelations
Lack of recent rate volatility offers cause for optimism
The Canadian dollar plunged in the wake of Trump’s statement, issued via Truth Social on Monday. But while US Treasury yields ticked higher, the bond market appears to be taking a cautious approach on the possibility of January tariffs.
Casa pointed to encouraging signs for mortgage rates since they jumped in the aftermath of Trump’s election night victory, with the average rate on a 30-year mortgage falling to 6.81% this week – well below its level of 7.22% a year prior, according to Freddie Mac.
“I think the market is still trying to figure out the impact that Donald Trump’s policies are going to have on the economy,” he said. “But I think as the days have gone on since the election, we’re starting to see the upward swing of rates that was the initial reaction start to ease and come back down.
“We’re cautiously optimistic about the rate outlook and we’re very optimistic about seeing increased purchase volume in 2025 via increased inventory.”
How will labor market trends influence US homebuying demand?
One economic factor for mortgage market watchers to keep an eye on is a tightening labor market, which is beginning to show signs of strain after defying expectations of a slowdown in the opening months of the year.
A growing trend of companies requiring their workforce to return to the office is a sign of a jobs market currently tilted in favor of employers – and that could have implications on the housing front, Casa said.
“People are finding it much more challenging to find jobs. Wages are leveling off or coming down, and I do expect that to play a role in homebuying demand,” he explained. “I think a lot of people were saying, ‘Well, when rates come down, the demand is going to go through the roof.’
“I think the demand is going to increase, but I think the factor that’s probably going to hedge that is the fact that the jobs market is softening and that means there’s going to be fewer qualified buyers and people looking to buy a home in this environment.”
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