According to an article from the Texas Real Estate Research Centre, recent tariffs have disrupted global trade and sparked widespread economic uncertainty. New tariff policies implemented in April created distortions and uncertainty throughout the global economy, disrupting supply chains and trade markets.
This uncertainty could impact U.S. capital markets by potentially driving away foreign investment and creating inflation risk, factors that could lead to higher interest rates. Historically, trade liberalization increased foreign investment in the U.S., lowering domestic interest rates and improving access to credit for various sectors, including households and businesses. However, as tariff uncertainty permeates financial markets, capital inflows might begin to recede, potentially leading to higher borrowing costs. Additionally, tariff-induced inflation is considered highly likely, and the Federal Reserve would likely be inclined to increase interest rates in response.
The combination of reduced foreign capital inflows and accelerating inflation raises the possibility of a significant increase in U.S. interest rates, potentially surpassing post-pandemic peaks. Higher rates would impact the economy broadly, further weakening the housing market by eroding affordability and suppressing demand, and causing business investment to decline.