President Trump has declared war on the price of credit. With Americans still smarting about high prices from recent inflation and the costlier mortgages, car loans and credit balances that resulted, politicians are scrambling for ideas to improve affordability.

Democrats prefer subsidies and price controls to lower out-of-pocket costs on everything from rent to utilities. Trump’s instinct, shaped by real estate, is to force borrowing costs down, by edict, bureaucratic manoeuvre and to put pressure on the Federal Reserve.

Trump has this week demanded a one-year cap of ten per cent on credit card interest rates, for example. He does not have unilateral authority to do this without legislation. But with average US card rates about 20 per cent, he is effectively trying to enforce a tightly binding price control with rates below even their pre-pandemic norm.

If he is successful, the results would be predictable. A credit card rate is the price of unsecured, revolving credit. It covers funding costs, expected defaults, administration and a margin for risk. If you legislate a ceiling far below the risk-adjusted rate, you do not repeal the risk. You forbid its recognition. The predictable result is a shortage — of demand for credit exceeding supply.

Unable to ration by price, businesses will instead ration access. Those with poor credit scores or lack of credit history will endure fewer approvals, closed accounts or higher fees. When the boiler breaks or car fails, these American families will not be consoled by Trump’s warm intent. They will be driven toward payday lenders, pawnbrokers and loan sharks.

Trump’s moves on mortgage costs are more elaborate. He has instructed his administration to have government-sponsored enterprises, Fannie Mae and Freddie Mac, buy $200 billion of mortgage-backed securities. The theory is simple: a giant buyer bids up the price of those bonds, pushes down their yield and compresses the “mortgage spread”, allowing lenders to offer slightly lower mortgage rates while still selling or securitising loans profitably. The downside is equally simple: it concentrates duration and prepayment risk at entities implicitly backed by the state, while further politicising housing finance.

His third front is more corrosive still. Trump’s justice department has launched an investigation into Federal Reserve chairman Jerome Powell’s testimony about the Fed’s costly headquarters renovation. Powell describes this as lawfare designed to intimidate the central bank to deliver sharply lower policy rates to stimulate the economy and lower government borrowing costs. At stake is the Fed’s much-feted independence.

On this, Trump’s impulses really could backfire. The Fed can pin down short-term, risk-free rates in the banking system by setting the interest it pays on reserves and the rate on overnight reverse repos. That influence passes quickly into Treasury bills, repo, and bank prime. But the Fed does not dictate the ten-year Treasury yield, still less the 30-year mortgage rate. Those are market prices.

Indeed, a long-term yield is, roughly, the expected path of future short rates plus compensation for expected inflation plus a term premium for holding duration. Mortgages add an extra spread for prepayment and other risks. The Fed influences these mainly through expectations and credibility, lowering rates by credibly committing to resist inflation. However, if investors think Trump’s pressure will prevent the Fed from restraining inflation — see Turkey and Argentina — they will demand a higher inflation risk and term premium. So long-term yields can rise even as the Fed cuts. Mortgage rates could rise too.

As a libertarian, I am no apologist for the Federal Reserve. Indeed, I still think monetary errors were the primary cause of the recent inflation and resultant discontent. But one thing worse than monetary policy errors from central banks is a monetary policy driven by political whim. The risk is that this could unmoor or de-anchor inflation expectations, raise the cost of credit and encourage more of the ham-fisted, signal-destroying price controls that the president now desires.