Will Trump's credit card gambit work?

THE RETIRED INVESTOR

Jawboning, bluster, threats and court actions have yet to force the Federal Reserve Bank to do the president's bidding. Undeterred, Donald Trump thinks he has found a way to lower consumer borrowing costs without further Fed action. Given his background in real estate, where borrowing is a way of life, it is no wonder he believes lowering borrowing costs for consumers is the key to affordability. As of November 2025, the U.S. consumer debt was roughly $18.10 trillion, a new record. Mortgage debt represents $13.39 trillion, while bank cards account for $1.09 trillion. Overall, consumer debt rose 2.9 percent from the prior year.

There is no question that, with that amount of debt, any relief effort would be well received by many voters. In response to an affordability issue that the administration denies, President Trump has demanded that credit card companies cap interest rates at 10 percent. He also ordered Fannie Mae and Freddie Mac to buy $200 billion worth of mortgage bonds. By doing so, he believes mortgage interest rates will fall, which could attract new buyers to the housing markets.

Both initiatives were announced on Truth Social rather than through a legislative proposal to Congress or by drafting new regulations. It makes one wonder if these are serious proposals or simply preelection promises. But let's give the president the benefit of the doubt and ask: Wat does this accomplish?

Circumventing the Fed, which officially oversees interest rates, is questionable business, but it has happened before. Prior to 1935, there was really no difference between the U.S. Treasury and the Federal Reserve Bank; however, over time, a series of amendments made the Fed the master of monetary policy.

In the case of housing affordability, buying up bonds might work. After Trump's media post, long-term rates on U.S. 30-year bonds fell below 6 percent but have risen since. There has been little impact on the benchmark 10-year bond.

The problem is that lower rates, while making a mortgage more affordable, can also push home prices higher. He also signed an executive order this week to prohibit institutions from buying single-family homes, something he believes has contributed to rising housing prices.

As for capping credit card interest rates for one year, which are now, on average, higher than 24 percent, it has been tried before, not only here in the U.S. but also in other countries. President Jimmy Carter, through his March 1980 credit control policy, attempted to limit additional borrowing through credit cards. The policy lasted about two months. France, South Africa, Ecuador, Japan, Kenya, South Korea, and the Philippines are other examples of what happens when caps are imposed.

In every case, caps shrink credit access for high-risk borrowers (most retail borrowers). Credit card companies (read: banks) simply stop lending or won't approve applicants they deem high-risk, including low-income or subprime consumers. Smaller loans disappear, and average loan size increases.

Short-term credit dries up. Lend-ers shift to serving higher collateral borrowers. People who pay off their credit card charges in full each month are sought after. It usually ends with a series of workarounds. Retailers and auto dealers, for example, move in offering financing with baked-in high credit costs in their product prices.

Unregulated pawn loan shops, rent-to-own stores, payday lenders, and loan sharks all experience a sharp increase in business because most, if not all, of them are excluded from the interest rate cap. By now, you are catching my drift. The fact that the cap would only be instituted for one year could save consumers billions in interest payments, but once it ended, there is no guarantee that banks wouldn't raise interest rates to recoup their losses.

JP Morgan's well-respected CEO, Jamie Dimon, said in an Economist interview last week that the proposed 10 percent cap on credit card interest rates would effectively cut off credit for roughly 80 percent of Americans. He said the policy would be an economic disaster, shrinking access rather than protecting consumers.

History says he is right, but by then the votes would have been counted, and that's the objective. Welcome to American populist politics.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. His website is schmicksretiredinvestor.com. He can be reached at 413-347-2401, or email him at [email protected].