04/17/2025
Mortgage rates spiked this week as President Trump’s tariffs led to instability in the bond market. Tariffs do not directly affect mortgage rates, but they can have indirect effects through broader economic channels. They can make mortgage rates go up or down, depending on whether they cause inflation or economic slowdown.
Tarriffs and Inflation
Tariffs increase the cost of imported raw materials such as steel and aluminum, which increases construction costs, ultimately pushing home prices up as these increased costs are passed on to consumers. This fuels inflation overall. As inflation rises, the Fed often raises the federal funds rate to keep it in check. Since mortgage rates are heavily affected by broader interest rate trends (especially the 10 year Treasury), mortgage rates will rise. Therefore:
Tariffs ——> Higher Inflation ——> Fed Rate Hikes ——> Higher Mortgage Rates.
Inflation and Interest Rates
On the other hand, tariffs during trade wars create uncertainty in markets. As a result, the Fed may cut rates to stimulate growth, and this in turn will reduce mortgage rates. Moreover, investors might flee to safer assets like U.S. Treasuries, pushing their yields down, which can reduce mortgage rates as well. So in this case:
Tariffs ——> Economic Slowdown ——> Fed Rate Cuts ——> Lower Mortgage Rates
Example (China Tarriffs in 2018-2019):
In 2018 the U.S. imposed tariffs on Chinese imports (including steel and aluminum). China retaliated with tariffs on U.S. exports, which created major economic uncertainty. As a result, home builders faced higher costs, passing along those costs to buyers by increasing housing prices. In 2019 the Federal Reserve cut interest rates three times to counteract the economic slowdown caused by the tariffs. Subsequently, treasury yields dropped and mortgage rates fell- despite rising costs elsewhere.