January 23, 2025
If people believe the US equity market (S&P 500) closed at a record high today because lower interest rates will follow President Trump’s demands, they are dumb.
The President is not the brightest light in DC for even trying. Even high school students know better.
Interest rates are determined by supply and demand, not by presidential demands.
Presently, interest rates are high in the US because:
1. Many individuals and companies want to borrow money (high demand).
2. Banks are cautious and not lending as much (low supply).
For interest rates to decrease, either:
1. Demand for loans must decrease.
2. Banks must lend more.
However, banks are currently hesitant to lend due to:
1. Customers’ poor credit.
2. The government’s need for funds is met when the banks buy the US Treasuries, which reduces the banks’ ability to lend.
However, the Federal Reserve intervenes whenever US banks lend too much, raising its policy rate even higher and making borrowing even costlier.
In a nutshell, compared to President Trump’s words, his actual influence on interest rates is virtually zero, and his demands will ultimately have little effect when intelligent decisions return to the market.
Rather than intervening in global financial markets by trying to force prices his way, the President ought to show the world his plan to cut the budget deficits and reduce the national debt.
Doing that would be the smart thing.
Investors can also do the smart thing: consider the Mother Goose nursery rhyme, which includes the lines “Jack be nimble, Jack be quick, Jack jump over the candlestick.”
You have to be nimble. The market’s response to the President’s remarks today shows how quick, intelligent decisions will be needed in the near future.
