Interest Rates Are Falling—Thank Government Spending Cuts for That
The 10-year interest rate has fallen by half a percentage point in the past month—from approximately 4.8 percent to 4.3 percent. Several factors determine interest rates, including inflation and economic growth, but perhaps the most consequential is the supply of and demand for government bonds.
If the Department of Government Efficiency (DOGE) continues at its current pace—which according to its website includes approximately $52 billion in cuts to date—it could possibly cut $1 trillion in spending in its first year. This will mean $1 trillion fewer bonds being issued, reducing the overall bond supply. A lower supply drives the bond price higher, and because bond prices move inversely to interest rates, this will result in materially lower interest rates. This shift is already being reflected in the bond market.
Government borrowing “crowds out” private borrowing—a concept familiar to anyone who has taken a high school economics class. Essentially, the government gets to borrow first, in the form of treasury bonds, and you get to borrow second, in forms such as a mortgage or a car loan. The more the government borrows, the more it pushes up interest rates, which results in higher interest rates on things like homes and automobiles.
If the government hadn’t borrowed so much money during and after the COVID-19 pandemic, it’s likely that mortgage rates right now would be lower—perhaps significantly lower. The typical 30-year fixed-rate mortgage is about 7 percent at the moment. If mortgage rates were one percent lower, the month
Article from Reason.com
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