Podcast Summary: Money Rehab with Nicole Lapin – "How Trump Will Impact Interest Rates"

Host: Nicole Lapin
Podcast: Money Rehab
Episode Title: How Trump Will Impact Interest Rates
Producer: Money News Network
Knowledge Cutoff: October 2023

1. Introduction: Navigating Economic Shifts Post-Election

In this episode of Money Rehab, Nicole Lapin delves into the economic turbulence following Donald Trump's election victory. With significant movements on Wall Street, including the Federal Reserve's (Fed) second rate cut since the tumultuous COVID-19 era, Nicole explores how Trump's policies may shape interest rates and the broader financial landscape.

2. Trump and Jay Powell: An Intricate Relationship

Nicole begins by addressing a common assumption that Trump can directly influence interest rates. She clarifies, "[Trump] isn't the decision maker when it comes to interest rates. Our guy when it comes to interest rates is Jerome Powell, AKA J. Powell, the chairman of the Federal Reserve" (00:02).

Jay Powell’s Background:

• Professional History:
  Jay Powell, appointed by Trump in 2018, has a robust background, including serving as Assistant Secretary and Undersecretary of the Treasury under President George H.W. Bush. He was also a partner at the Carlyle Group, a leading private equity firm.

• Academic Contributions:
  Powell was a visiting scholar at the Bipartisan Policy Center, where he earnestly worked to persuade Republicans to raise the debt ceiling without triggering a government shutdown, earning a symbolic salary of $1 per year (00:02).

Dynamic with Trump:

Nicole emphasizes, "Trump and Jay Powell have had some exchanges in the press lately that seem a little testy" (00:02). Despite recent tensions, Powell's extensive experience and secure position until 2026 make him a formidable figure in monetary policy.

3. Decoding Interest Rates: Fed Rate vs. Mortgage Rates vs. Bond Yields

Nicole provides a clear differentiation between various types of interest rates:

• Fed Rate:
  "The interest rate that the Fed sets is the rate banks charge each other for overnight loans. That is it. It is not your interest rate, it is not your mortgage rate, it is not your car loan or even the treasury bond rate" (00:02).

• Bond Yields:
  Investors' expectations for lending to the government. Normally, Fed rates and bond yields move in tandem, but currently, Fed rates are decreasing while bond yields are rising. This divergence is attributed to anticipations that the Trump administration might increase borrowing, potentially through tax cuts (00:02).

• Mortgage Rates:
  "Mortgage rates usually trend with the 10-year bond yield more than the Fed rate" (00:02). Consequently, even if Fed rates drop, mortgage rates may not follow suit immediately.

4. Can Trump Influence Fed Rates? Exploring the Limits

Nicole assesses Trump's potential to influence interest rates:

• Direct Influence Limited:
  Only Jay Powell and the Fed board control the Fed rate. Trump lacks formal authority to set these rates.

• Potential Pressure Points:
  Trump could attempt to pressure the Fed or even seek to replace Powell with a more compliant chair. However, Powell has stated, "No," when questioned about resigning under Trump's demands, underscoring the Fed's independence (00:02).

• Powell’s Secure Position:
  Despite Trump's assertion that he won't reappoint Powell, Powell’s term extends to 2026, and his strong ties within Wall Street and Capitol Hill provide him with substantial support (00:02).

5. Trump's Broader Economic Strategies and Their Impact on Inflation

Beyond interest rates, Trump has proposed several strategies to combat inflation. Nicole breaks down each approach:

a. Lowering Gas Prices

• Challenges:
  Limited presidential control over private energy companies. Potential measures include supporting increased U.S. oil production or releasing petroleum from the Strategic Petroleum Reserve.

• Reality Check:
  Gas prices are already lower than their peaks in 2008 and 2012, making significant reductions unlikely without substantial policy shifts (00:02).

b. Cutting Taxes

• Economic Implications:
  While tax cuts are popular, they can inadvertently fuel inflation by increasing money circulation. Additionally, reduced tax revenue might lead to increased government borrowing, potentially devaluing the dollar (00:02).

• Trump's Counter:
  He posits that increased tariffs will offset the revenue loss from tax cuts, aiming to maintain fiscal stability without resorting to money printing (00:02).

c. Raising Tariffs

• Mechanism:
  Tariffs act as taxes on imported goods, intended to discourage outsourcing. For example, a 200% tariff on tractors produced in Mexico would significantly raise costs for companies like John Deere (00:02).

• Consequences:
  Higher production costs can lead to increased consumer prices and potential retaliatory tariffs from other nations, escalating inflationary pressures (00:02).

d. Mass Deportations

• Economic Impact:
  Targeting undocumented labor in sectors like agriculture and construction can shrink the workforce, driving up wages. This, in turn, may elevate prices for food, housing, and other essentials, exacerbating inflation (00:02).

6. Analyzing the Inflation Outlook Under Trump’s Policies

Nicole concludes that many of Trump's proposed measures could inadvertently raise prices rather than lower them. The intricate balance between government interventions and market reactions makes the economic outcomes uncertain. She notes, "It is possible that Trump's policies could actually raise prices, not lower them" (00:02).

However, Nicole remains optimistic about opportunities within inflationary environments. She emphasizes the importance of informed investment strategies to leverage economic shifts effectively.

7. Investment Insights: Balancing Your Portfolio

Amidst discussions on macroeconomic policies, Nicole offers a practical tip:

• Portfolio Diversification:
  "Stocks are soaring right now, which is fantastic. But it might mean your portfolio is leaning too heavily towards stocks and not toward lower risk investments like bonds" (00:02).

• Rule of Thumb:
  Let your age determine the percentage of bonds in your portfolio. For instance, a 30-year-old should consider 30% bonds and 70% stocks to balance growth potential with risk management (00:02).

8. Conclusion: Preparing for Economic Uncertainties

Nicole wraps up the episode by reinforcing the importance of financial literacy and proactive money management. She invites listeners to engage by sending their money questions to moneyrehab@moneynewsnetwork.com, with the possibility of having them addressed on the show or even participating in a one-on-one intervention.

Notable Quotes with Timestamps:

• "Trump isn't the decision maker when it comes to interest rates. Our guy when it comes to interest rates is Jerome Powell..." (00:02)
• "Jay Powell simply said no. He pointed out that Trump doesn't have the power to fire him or other board members." (00:02)
• "Mass deportations could end up driving up inflation, particularly in industries like agriculture and construction." (00:02)
• "Stocks are soaring right now, which is fantastic. But it might mean your portfolio is leaning too heavily towards stocks and not toward lower risk investments like bonds." (00:02)

Stay Connected:

• Email: moneyrehab@moneynewsnetwork.com
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Credits:

• Host: Nicole Lapin
• Executive Producer: Morgan Lavoy
• Researcher: Emily Holmes

Disclaimer: This summary is intended for informational purposes only and does not constitute financial advice. Always consult with a professional financial advisor for personalized guidance.