Interest rates have loomed large for the past two years as the Federal Reserve raised the federal funds rate to its highest level in 23 years in order to combat the worst bout of inflation since the early 1980s.
Wall Street is particularly homed in on interest rates after the Federal Reserve cut rates for the first time in four years at its September meeting, by a jumbo-sized 50 basis points (0.50%).
But with the presidential election looming in less than a month, it's also fair to ask whether the election itself, and the winner between Vice President Kamala Harris and former President Donald Trump, would have an impact on interest rates.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This matters because interest rate policy flows through to virtually every corner of the economy and the capital markets, creating both winners and losers. Higher rates over the past two years have made cash and bonds reasonably good investments again for the first time in 20 years, which is an unambiguous positive.
Of course, they've also made capital vastly more expensive for companies, raised the cost of homeownership for new buyers, and even contributed to the government's busted budget, all of which are major negatives.
So, let's take a look at how the election might impact the direction of interest rates and what, if anything, we should do about it.
What causes interest rates to move?
Let's start with the basics. "Interest rates" are a broad universe that encompasses everything from the short-term federal funds rate — the overnight rate that banks charge each other — to maturities of 30 years or more. It also spans everything from risk-free government debt to highly speculative junk bonds and everything in between. Government policy, particularly from the Federal Reserve, can impact all of this to some extent.
The Fed sets short-term interest rates via its manipulation of the fed funds rate. As the central bank is nominally independent of the executive branch, the election won't have much of an impact on short-term rates, or at least not directly. Chair Jerome Powell firmly said in response to a question at the September press conference that that the Fed does not "take anything else into consideration" besides what's best for the American people — in other words, the Fed does not pay attention to non-economic factors like if an election is happening in its decision-making.
If we start to see excessive market volatility due to election jitters, that might influence the central bank's decision to cut rates faster or more aggressively. But that's about it.
Of course, that could change post-election. Although Trump has said he would let Powell finish out his term, he has also at times indicated that he wants to exert more direct presidential control over the Fed, which would dilute the central bank's independence. What Trump would do with that power should he win remains to be seen.
Harris said in August she "would never interfere in the decisions that the Fed makes."
What is the election's impact on long-term interest rates?
The election's impact on long-term interest rates is a little more complex. This is because longer-term rates move based on the supply of and demand for bonds.
The budget deficit determines supply: the more the government borrows, the greater the supply of bonds. All else equal, a larger supply of bonds means lower bond prices and higher bond yields.
Demand is primarily based on growth and inflation expectations. All else equal, higher growth and higher inflation expectations mean higher yields. Lower growth and lower inflation expectations mean lower yields.
So, an election outcome that promises higher spending (perhaps a Democrat sweep) or lower taxes (possibly a Republican sweep) would likely mean higher long-term bond yields. A mixed election in which one party controls the White House and the other controls at least one house of Congress would likely mean no major changes to spending or tax policy, which would suggest lower yields, all else equal.
Bond yields also respond to investor fear. When investors are scared, they tend to run to safe havens like gold, cash and U.S. Treasury securities. This fear buying drives prices higher and yields lower.
The 2024 election promises to be cantankerous, and we can't rule out prolonged legal challenges, alternative elector slates or even political violence. If things get nutty out there, then we may see yields go much lower, at least until the dust settles.
That may seem counterintuitive, as political instability should make U.S. government securities appear riskier. The riskier a credit is perceived, the higher the interest rate.
There's an important point to remember though. Even an unstable government can pay back its debts if they are denominated in their own currency. There's no real risk of true default because the government could always print new dollars to pay off its bonds if push came to shove.
The bottom line on the election and interest rates
Let's be clear, our going assumption should be that the election will have only a minor direct impact on interest rates. Growth and inflation expectations, as well as the potential supply of new bonds due to government deficits, are going to have a much bigger impact.
But this isn't to say the election doesn't matter at all. The outcome can and will indirectly both the supply and demand drivers that move interest rates.
Related content
-
The Most Tax-Friendly State for Retirement in 2025: Here It IsRetirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D PremiumsIn 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Japan Tariffs: 5 Things That Might Get More Expensive for YouPresident Donald Trump's trade agreement with Japan features a 15% reciprocal tariff for all imported products, which could impact the prices of these items when you go shopping.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
Dow Dives 542 Points on Soft Jobs Data: Stock Market TodayThe last day of a busy week ends with the first greater-than-1% move in either direction in more than a month.
