How the 2024 U.S. Presidential Election Could Impact Commercial Loan Rates.

As the 2024 U.S. presidential election approaches, business leaders, investors, and economists alike are closely watching how its outcome may influence commercial loan rates.

Interest rates directly impact the cost of borrowing, a critical factor for businesses in need of financing for growth and operations. Although the Federal Reserve controls short term rates and maintains independence from the executive branch, a new administration’s policies on fiscal spending, taxes, and regulation could indirectly impact commercial loan rates.

In this article, we’ll delve into the potential impacts of the election on commercial loan rates and examine how factors like fiscal policies, regulatory changes, and market reactions might influence rates.

The Federal Reserve’s Role and the Independence Factor

First, it’s essential to understand the Federal Reserve’s role in setting short term interest rates. The Fed operates independently of the executive branch, meaning it bases decisions on economic conditions rather than political events. However, the Fed does consider external factors such as economic volatility, inflation, and employment, which can be influenced by election outcomes.

Federal Reserve Independence: The Fed has stated it will continue to prioritize inflation and employment over political factors. Therefore, any direct effect of the election on short term rates is unlikely.

Reaction to Economic Policies: If election related market volatility rises, the Fed could adjust rates to stabilize the economy. This could indirectly influence commercial loan rates if businesses perceive higher economic uncertainty.

The Federal Reserve’s independence means the election won’t directly affect the Fed’s short term rates, but the winning administration’s fiscal policies could create shifts in economic demand and inflation, which may impact commercial loan rates indirectly.

Potential Fiscal Policies and Their Effects on Commercial Loan Rates

Both political parties have different fiscal priorities that could affect commercial loan rates:

Increased Government Spending: If the election leads to a government that favors high spending, this could stimulate economic growth but also lead to inflation. High inflation can pressure the Fed to raise interest rates, which might increase commercial loan rates.

Tax Reductions: Tax cuts, particularly those affecting corporations, could boost business profits, increasing investment in capital and labor. However, this can lead to increased borrowing demand, which may cause commercial loan rates to rise if lending institutions adjust for demand.

Deficit and Debt Impact: Higher spending without sufficient revenue increases the federal deficit. To finance deficits, the government issues bonds, which impacts bond yields and, by extension, commercial loan rates. A government focused on reducing the deficit might create stability, which may help stabilize loan rates.

The economic impact of spending and tax policies varies by the party in power. Historically, more significant spending has often led to rising inflation and interest rates, while more conservative spending can stabilize rates but limit economic growth.

Regulatory Changes and Their Impact on Commercial Loan Rates

Beyond fiscal policies, regulatory changes play a significant role in influencing commercial loan rates:

Financial Regulation: A government focused on tightening regulations in sectors like banking may drive up compliance costs for lenders, which can lead to higher commercial loan rates. Stricter regulations can lead to lower lending activity, impacting availability and rates for commercial loans.

Deregulation Effects: Conversely, a government that favors deregulation could create a friendlier lending environment by reducing costs and barriers for financial institutions. This often results in more competitive commercial loan rates.

Sector Specific Impact: Regulatory focus on sectors like energy, technology, or real estate may influence how lenders approach loans for companies in those industries. Sector focused regulations can make loans riskier and, as a result, may raise commercial loan rates in those industries.

Elections often bring shifts in regulatory priorities, and even small regulatory adjustments can create significant fluctuations in commercial loan rates due to changes in lender behavior and risk assessments.

How Market Volatility and Investor Confidence Influence Commercial Loan Rates

Political events, especially high stakes elections, can create market volatility. Market reactions to election outcomes can indirectly impact commercial loan rates:

Investor Reactions to Uncertainty: When investors are uncertain, they may seek safer investments like U.S. Treasury bonds, lowering yields. Lower bond yields can signal stability, reducing commercial loan rates as lenders face less competitive pressure from bond investments.

Post Election Market Adjustments: If the election results in a clear, uncontested outcome, investor confidence can stabilize quickly, helping maintain steady commercial loan rates. However, a contested election could lead to prolonged market volatility, which could push commercial loan rates higher as lenders adjust for perceived risk.

Global Reactions and Trade Policies: International investors also react to U.S. elections, especially when global trade policies are involved. Trade policies that affect exports or imports could influence economic growth and borrowing costs domestically, potentially impacting commercial loan rates.

Market stability is crucial for maintaining steady interest rates, and elections can sometimes disrupt this balance. However, a stable and predictable outcome can help lenders maintain competitive commercial loan rates.

Long Term Projections for Commercial Loan Rates Post Election

In addition to immediate postelection adjustments, there are long term factors to consider. The administration’s approach to economic growth, inflation control, and foreign policy can shape the economic landscape and influence commercial loan rates:

Inflation and Growth Expectations: Higher expected growth may result in higher demand for capital, potentially increasing commercial loan rates if inflation rises accordingly. Conversely, slower growth could keep rates low.

Debt and Bond Markets: Future administrations that increase government debt issuance may inadvertently drive up long term bond yields, which impacts commercial loan rates.

Trade Policy and Economic Alliances: Trade relationships and tariffs affect economic growth and inflation, influencing the Fed’s rate policy indirectly. Trade policies that encourage growth can stabilize commercial loan rates, while protectionist policies may increase rates due to market instability.

Long term rate projections depend heavily on growth, inflation, and debt management strategies. Clear and consistent economic policies generally contribute to stable commercial loan rates.

Key Takeaways

The 2024 election’s impact on commercial loan rates involves a complex interaction of economic policies, market reactions, and investor confidence. The direct effects on rates will be limited by the Fed’s independence, but the administration’s approach to fiscal spending, regulatory changes, and global trade will influence how rates evolve over time.

Federal Reserve Independence: The Fed’s priority on inflation and employment limits direct election impacts on short term rates.

Fiscal Policies: Increased spending could lead to inflation, while tax cuts might boost demand for loans, both of which can impact commercial loan rates.

Regulatory Shifts: Tighter regulations could lead to higher rates, while deregulation might lower commercial loan rates.

Market Reactions and Investor Confidence: Political uncertainty can drive market volatility, influencing rates indirectly.

Long Term Economic Outlook: Inflation expectations, trade policies, and bond markets will impact commercial loan rates over time.

Conclusion

In conclusion, the election outcome will shape the economic environment, indirectly affecting commercial loan rates through changes in fiscal policies, regulatory approaches, and market stability. Business owners should stay informed and prepare for potential fluctuations in loan costs based on these broader economic trends. As election results unfold, staying aware of policy changes can help businesses manage financing costs effectively.

Origination numbers for commercial mortgage lending

Election Year	President-Elect	Economic Impact	Effect on Commercial Loan Rates
2012	Barack Obama (Re-election)	Focus on economic recovery post-2008 recession Continuing recovery led to stable growth Implementation of the Affordable Care Act influenced healthcare costs and labor markets	Fed maintained low interest rates to support recovery Commercial loan rates remained low to support borrowing
2016	Donald Trump	Initial economic optimism led to increased stock market confidence Tax Cuts and Jobs Act of 2017 boosted corporate profits Trade policies, particularly tariffs, increased market uncertainty	Fed raised interest rates gradually to counteract potential inflation Commercial loan rates increased slightly, reflecting Fed hikes
2020	Joe Biden	COVID-19 pandemic required substantial stimulus measures American Rescue Plan introduced to support economic recovery Focus on infrastructure investment and green energy initiatives	Fed raised intereste rates to combat massive inflation Commercial loan rates increased dramatically due to inflationary pressure