How Political Pressure on the Fed Could Impact Real Estate Affordability

Outcomes in the U.S. housing market are indelibly tied to the Federal Reserve’s monetary policy decisions. As a result, recent efforts by the Trump administration to pressure the Fed into lowering rates has rekindled long-standing concerns over the central bank’s independence and the impact it could have on real estate and other asset markets. This ongoing political pressure will test the Fed’s political insulation, and the results could have a significant, long-standing effect on these asset markets. While many factors can influence long-term interest rates and asset markets, this article focuses specifically on the impact that withering central bank independence can have on these markets. 

Economic research shows that when external political entities can and do interfere with monetary policy—as U.S. presidents have done in the past—inflationary episodes typically ensue. This happens because external policymakers, often seeking a near-term political gain, typically prefer expansionary monetary policy, leading to short-term macroeconomic stimulus but long-term inflation. To prevent this from happening, governing bodies seeking to establish well-functioning central banks create political insulation through legal features like long-term appointments for governing officials.  

As in past episodes, the current political influence on monetary policy is expected to increase long-term inflation. Even if politically motivated rate reductions result in inflation near the Fed’s 2 percent target, the revealed political exposure would increase inflation expectations, causing long-term rates to rise. Moreover, since real assets serve as a hedge against inflation, real estate demand is likely to increase. Although higher interest rates and higher demand would have an ambiguous impact on valuations, broad housing affordability would likely worsen as a result, particularly for first-time homebuyers.

In addition to political influence on short-term rates, an expansion of the Fed’s monetary policy tools during the Great Financial Crisis of 2008 exposed yields on private long-term assets, including mortgage-backed securities, to the central bank’s independence. In particular, while the trading of private securities that began in 2008 enhanced the Fed’s ability to promote financial market stability, the move inherently tied those markets to the Fed’s political insulation. If external policymakers can pressure the central bank into implementing expansionary policy through balance sheet operations (like buying mortgage-backed securities), it could begin to influence those markets directly. 

Executive agencies, including the U.S. Treasury Department, could directly buy private assets with the approval of Congress. However, that would require issuing new debt or raising tax revenue to fund the purchase, whereas the Fed could simply create money to make the purchase. As in the case of lowering short-term interest rates, Fed purchases of private long-term assets would generate short-term stimulus while contributing to long-term inflation. In the case of mortgage-backed securities, the effect could be similar to the post-pandemic surge in home prices, as mortgage interest rates hit historic lows. 

External efforts to influence monetary policy could lead to several possible outcomes. Legislative and judicial outcomes that preserve or enhance Fed independence would likely help anchor inflation expectations, leading to greater long-term price stability and lower nominal interest rates. Conversely, if external policymakers can successfully influence the Fed into implementing accommodative monetary policy—even if that policy were ideal under current circumstances, the long-term implications would be sufficient to raise long-term inflation expectations, causing real estate affordability to deteriorate.  

Views expressed on The 338 are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Research, or Texas A&M University.