How could Trump's attempts to control the Fed affect Gulf borrowers?

Mortgage rates and short-term rates both likely to be affected by President's moves

US President Donald Trump's attempt to exert greater control over the Federal Reserve could have a meaningful effect on borrowing costs for people across the Gulf.

Mr Trump's latest attempt to seize control of the US central bank involved firing Fed governor Lisa Cook – a first in the Fed's history – over mortgage fraud allegations. Ms Cook intends to file a lawsuit against Mr Trump and said he has no authority to fire her.

It is the latest, and most dramatic, attempt by the President to push for a greater say on how the US central bank sets its interest rates. Mr Trump has expressed fury this year over the Fed's refusal to lower rates so far this year, repeatedly attacking chairman Jerome Powell and making a near-unprecedented visit to the central bank's headquarters, where he slammed the institution for cost overruns related to its renovation project.

Mr Trump has repeatedly called for the Federal Reserve to lower the funds rate, which sits at 4.33 per cent, to 1 per cent. While Mr Powell indicated last week that recent economic indicators “may warrant” a reduction as soon as next month, it is highly unlikely the Fed will cut at the magnitude Mr Trump wants.

Fed's Jerome Powell leaves door open for US interest rate cuts

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By removing Ms Cook, Mr Trump could install a new member on the Fed's board of governors. The seven governors serve on the rate-setting Federal Open Market Committee along with the New York Fed president and four regional Fed bank presidents who serve one-year terms on a rotating basis.

“We’ll have a majority very shortly,” Mr Trump said on Tuesday. “So that’ll be great.”

It remains unclear if he has the legal authority to fire Ms Cook. However, if successful, the ripple effects could be felt across the Gulf.

Treasury yields in the spotlight

Most central banks in the Gulf Co-operation Council follow the Fed's rate decisions because of the dollar peg. The UAE, for example, has kept its base rate steady at 4.40 per cent this year because the Fed has left US interest rates unchanged.

If a politicised Fed were to lower rates to the 1 per cent level Mr Trump has asked for, it is likely that the UAE Central Bank and others in the region would also lower rates by more than 300 basis points.

Lowering rates at this scale is almost unheard of outside an economic emergency. The last time the Fed reduced rates by more than 50 basis points was in response to the Covid-19 pandemic in March 2020.

This would effectively lower short-term rates for borrowers in the region, such as ones on credit cards.

The two-year Treasury yield, which is sensitive to the Fed's rate decisions, fell more than 4 basis points to 3.68 per cent on Tuesday.

Federal Reserve governor Lisa Cook with Fed chairman Jerome Powell at the central bank's headquarters in Washington. AP

However, an adverse effect could be felt in longer-term borrowing costs.

While Gulf consumers could see lower interest on their credit card debt, they could also see higher rates on things such as mortgage rates, which rely more on long-term yields.

The yield on the 10-year fell less than two basis points at 4.26 per cent. The 30-year added more than three basis points to 4.92 per cent.

The steepening of the yield curve showed that while investors anticipate lower interest rates in the near term because of Mr Trump's efforts, they expect higher rates in the long term as his actions cast uncertainty over the Fed's independence.

Trump hats hang above a CNBC broadcast on the floor at the New York Stock Exchange on August 25. Bloomberg

While major indexes on Wall Street closed in the green on Tuesday in anticipation of Nvidia earnings on Wednesday, increased volatility in the bonds market could be cause for concern in the Gulf mortgage markets.

“The mortgage market, which is much more reliant on long-term debt instruments, is at risk from Treasury yields picking up,” said Azad Zangana, a Middle East economist at Oxford Economics.

A weakening of the US dollar could also increase the prices of imports in the region, particularly for goods from Europe and Asia.

The 'flip side' to the dollar peg

Political uncertainty in Washington comes at a time when Gulf economies are performing strongly.

The UAE Central Bank in June projected the Emirates' economy to grow at a 4.4 per cent rate this year before expanding at 5.4 per cent in 2026, while the International Monetary Fund forecast Saudi Arabia's gross domestic product to expand by 3.5 per cent this year.

Gulf economies may have to react accordingly to guard against potential drawbacks from monetary policy manoeuvres from Washington.

“This is kind of the flip to of the benefits of being tied to another currency,” Mr Zangana said

He added that Gulf economies may need to lean against additional monetary stimulus that could be coming from lower interest rates later this year.

“They're going to have to manage that, probably through fiscal policy more than anything. But I think that that they do have the ability to do that,” he said.