Hi Friends,
As economic tensions rise, the pressure on the Federal Reserve to lower interest rates is intensifying—especially from political leaders. Former President Donald Trump, in a particularly aggressive stance, recently stated that removing Fed Chairman Jerome Powell “cannot come fast enough.” This sentiment comes after years of tension between the two, with Trump repeatedly calling for rate cuts throughout his presidency, often in opposition to Powell’s more cautious approach.
Now, the White House is reportedly exploring the legal possibility of terminating Powell, citing national security risks associated with an ongoing trade war. If this challenge is pursued, it could lead to a historic constitutional battle that may ultimately be decided by the Supreme Court.
What’s Driving the Push for Rate Cuts?
The push for a more accommodative monetary policy comes as signs of a slowing economy begin to mount:
Labor Market Softening: Job growth has been cooling, and unemployment has inched higher—even before the latest wave of tariffs.
Housing Market Pressures: Rising mortgage rates have impacted builder confidence and hiring in the construction industry, both of which signal early signs of recessionary stress.
Reduced Government Spending: Cutbacks in federal hiring have also diminished a key source of economic stimulus.
The Fed’s Hawkish Tone: Powell has maintained a cautious, anti-inflationary stance, further frustrating calls from Trump and others for rate relief.
Amid these conditions, the Trump administration is hoping that lower interest rates and energy prices can strengthen consumer confidence, especially among core political constituencies like farmers, construction workers, and truckers.
The legal basis for firing a Fed Chair is murky at best. While the Federal Reserve is designed to operate independently of political influence, the White House Economic Council is reportedly reviewing options for dismissal—an unprecedented action that could shake investor confidence and Federal Reserve credibility.
What Are Markets Expecting?
Here’s what the market currently anticipates for Federal Reserve rate decisions in 2025:
May 2025: No change
June 2025: Cut by 25 bps (4.00–4.25%)
July 2025: Cut by 25 bps (3.75–4.00%)
September 2025: Cut by 25 bps (3.50–3.75%)
October 2025: No change
December 2025: Cut by 25 bps (3.25–3.50%)
However, some analysts warn that cutting rates prematurely or for political reasons could backfire.
The Risk of Politically Driven Rate Cuts
Redfin’s Chief Economist, Chen Zhao, cautions that politically motivated rate cuts may ironically lead to higher—not lower—mortgage rates. Here’s why:
Inflation Expectations: If investors believe the Fed is compromising its independence or neglecting inflation risks, they may demand higher long-term yields, pushing mortgage rates up.
Historical Lessons: In the 1970s, political interference led to runaway inflation and a painful tightening cycle in the 1980s to restore stability.
Limited Tools at the Fed’s Disposal: While quantitative easing (QE) could help reduce long-term rates, it’s generally reserved for severe downturns—not the current moderate slowdown.
In short, hasty rate cuts may not produce the desired effect and could harm lower-income Americans by fueling inflation while providing little short-term relief.
Current Market Signals
Mortgage bonds have rebounded recently and have room to grow before meeting resistance. The 10-year Treasury yield is holding steady near its 100-day moving average, offering some rate stability. Despite recent volatility, these trends offer a glimmer of optimism for buyers and sellers alike.
Housing Market Headlines: Reality or Hype?
While headlines may suggest a crumbling market, the data tells a more nuanced story:
Cancelled Contracts: Redfin reported 13% of home sales fell through in March, similar to 2024 and even lower than 2023 levels. Historically, cancellation rates hover around 11%, so this isn’t alarming.
Seller Concessions: 44% of sellers are offering concessions—higher than last year but consistent with pre-pandemic norms.
Affordability Challenges: High mortgage rates are pushing more buyers to negotiate, but the market is normalizing rather than collapsing.
Economic Indicators Are Flashing Yellow
Other sectors of the economy are showing signs of stress:
Trucking Activity: Bookings fell 6% for large trucks and 33% for medium-sized ones in March, with cancellations at a two-year high.
Shipping Decline: Cancelled containers surged from 30,000 to 370,000 in just six weeks. Trans-Pacific shipping capacity has dropped dramatically.
Retail and Auto Sales: Auto sales declined 3% in Q1, and high-end homebuyers are pulling back amid stock market instability.
Housing Starts: Down 11% in March, further confirming softening demand.
These slowdowns were already occurring before the latest tariffs, suggesting underlying weakness in the economy.
Recession Risk and What It Means for Mortgage Rates
Government spending has helped prop up the economy, but that may be tapering. As the economy cools, mortgage rates may follow—but not without cost. Lower mortgage rates are usually a byproduct of economic pain.
If you’re hoping for cheaper rates, you’re also rooting for slower growth, job losses, and reduced consumer confidence. The trade-off is real.
Inflation Is Easing, but So Is Growth
CPI (March): Dropped to 2.39%, the lowest since early 2021
Core CPI: Fell below 3% for the first time in four years
Shelter Inflation: Declined from 8.2% to 4.0%, with further declines expected
At the same time, growth forecasts are dimming. The Atlanta Fed’s GDPNow model is projecting just 2.4% annualized growth for Q1. Consumer sentiment has also weakened, with the University of Michigan’s Sentiment Index falling to its second-lowest level ever.
Bottom Line: Be Careful What You Wish For
There is growing political pressure for the Fed to cut rates—but history tells us that rate cuts for the wrong reasons can do more harm than good. For now, a slower but more stable economy with a truly independent Federal Reserve may be the best path forward.
If you're in the market to buy or sell, remember:
Lower mortgage rates usually come with higher economic risk. Homeownership may be getting more expensive, but it's still one of the strongest long-term investments in uncertain times.