Last week, President Donald Trump demanded that “interest rates drop immediately” while addressing the World Economic Forum in Davos, Switzerland virtually.
He mentioned the falling price of oil as a driver for this to happen, along with his “historic victory” in the recent presidential election.
The general idea is that lower inflation should usher in lower interest rates, which is basically how it works.
However, the big question is why would inflation be lower under Trump’s second term?
Because of positive developments like lower government spending, or due to an economic crisis?
Bond Yields Drop as AI Stocks Fall
This morning, the stock market sold off as AI companies nosedived, driven by news of a Chinese AI company called DeepSeek.
Long story short, the early take is that DeepSeek has revolutionized AI by relying upon inference-time computing, which uses far less resources and computing power.
As such, chipmakers like stock market darling Nvidia (NASDAQ: NVDA) could be under pressure if demand for their chips turns out to be overblown.
Of course, the counterargument is that more efficiency leads to higher usage. This phenomenon is known as “Jevons Paradox.”
It means AI could become even more popular, eventually leading to even greater chip demand, despite falling prices, the end result being higher sales/profits for these companies.
So one might not want to get too caught up on this fast-moving story if they’re trying to ascertain the direction of the economy or the stock market.
However, it does call into question sky-high valuations in the stock market and the concentration of just a few names known as the Magnificent Seven.
If investors all of a sudden decide equities are too expensive, we could see the traditional flight to safety into bonds, thereby increasing their price and lowering yields.
And long-term fixed mortgage rates would likely follow them lower.
What About Trump’s Tariff Threats?
Another development that took place this week was a new tariff threat on Colombia, related to deportations.
The Trump administration had threatened to impose tariffs of up to 50% if the country turned away detained Colombian migrants, but the Colombian government eventually backed off.
As a result, the tariff threats became just that, threats. And it’s starting to make me wonder if they’re going to be mostly that for other countries as well.
Bond yields surged beginning back in October as Trump became the election frontrunner and his expected policies pointed to higher inflation.
Interest rates move higher when inflation expectations are high, and tariffs are said to be inflationary.
But if it turns out that the tariffs don’t actually materialize, or are less aggressive, the fear baked into bond yields could unwind.
The 10-year bond yield jumped about 100 basis points (bps) since early October from 3.75% to 4.75%, before coming down about 20 bps recently.
If this continues, mortgage rates will also ease. And they already have, drifting down from 7.25% to around 7%.
The next stop could be back into the high-6s if investors remain skittish. Or if economic reports continue to show inflation falling and the economy cooling. And that’s the rub.
Weaker Economy = Lower Mortgage Rates
Trump may get his wish of lower mortgage rates if the economy shows signs of weakness.
Assuming the stock market crashes and investors flock to bonds, lower mortgage rates might be the one silver lining.
But it’s unclear if Trump would see that as a victory. Sure, it could help more existing homeowners refinance to lower rates.
And some prospective home buyers might see it as an opportunity as well, even if the wealth effect loses its shine thanks to a less valuable stock portfolio.
However, the economy will ultimately be more important than low mortgage rates.
So really, the key will be threading the needle and getting to a point where 30-year fixed rates are lower, but not because of a faltering economy.
Lower because inflation has come down, the threat of tariffs was overblown, and government spending actually isn’t as bad as originally feared.
If Trump is able to pull that off, it’ll be a positive all around. The thing is it might mean that you’ll need to temper your mortgage rate expectations.
That scenario might result in low-6% mortgage rates, perhaps high-5s, but not a return to the golden age of 3% mortgage rates.
Read on: Does the president set mortgage rates?
