The economy was among one of the focal areas of President Donald Trump’s State of the Union address last month. Indeed, as more voters sour on the administration’s ability to address cost-of-living issues, the affordability crisis has seemingly become top of mind for the administration, especially as the midterm elections approach. Yet many potential policy options require Congressional authority, which will be a tough path. While there are certain policies that Trump can act on unilaterally, beyond tariffs, they will likely be too limited in scope. As a result, the overall economic impact of these affordability policies should be small. Nevertheless, there is a risk that a detour into more populist policies may have medium- to long-term consequences.
Despite the surprising resilience of aggregate consumer spending data, consumer confidence remains very poor. While this largely reflects the sharp price surge during the pandemic and a weak hiring environment, another important factor is at play: bifurcated outcomes across income groups.
Indeed, beneath the surface, a clear K-shaped divide has opened between high- and low-income households. While the overall macro data has remained solid, it has been largely anchored by high-income households that drive about 35-50% of all consumption. Meanwhile, spending among lower-income households has weakened, constrained by budgets stretched to the limit.
The root cause of this bifurcation is affordability, which has disproportionately impacted lower-income households:
- Inflation: Relative to more affluent households, lower-income households have experienced higher rates of inflation as food and housing costs, expenses this cohort spends the most on, have continued to run hot.
- Wages: As the labor market has softened, lower-income households have borne the brunt of this effect, experiencing lower wage increases relative to other income groups.
- Wealth: Lower-income households are less likely to have benefited from very generous wealth effects from steadily rising equity markets, which have seen the liquid wealth of the top 20% of households surge to nearly 80% of total household net worth.
As affordability pressures have intensified for many households, public sentiment toward the Trump administration has weakened. Recent polling shows growing frustration with the government’s handling of cost-of-living challenges: 64% of respondents say the administration has not done enough to reduce everyday prices, and 51% of registered voters say its policies have made life less affordable. This shift in sentiment has been mirrored in the broader political landscape, contributing to a decline in support for Republicans on the generic congressional ballot.
Cost-of-living issues typically rank among voters’ top concerns, and they figured prominently in the State of the Union Address, where President Trump emphasized a wide array of proposals to lower household costs. While the address signaled a clear rhetorical shift from last year’s emphasis on tariffs, policies that had previously contributed to rising consumer prices, specific details around new initiatives were limited.
Whether these proposals will meaningfully improve affordability remains uncertain. Several ideas carry a populist orientation and would involve direct market intervention, for example, capping credit card interest rates, which could lead to unintended consequences, including reduced credit availability and higher borrowing costs for some consumers. Additionally, many of the proposed measures would require Congressional approval, creating substantial uncertainty about what can ultimately be enacted.
The affordability issue is broad-based, especially as inflation continues to run at elevated levels. With this in mind, the administration has focused on four primary avenues to address the affordability challenge: trade policy, housing, consumer credit, and healthcare.
Trade policy
The Supreme Court’s decision to strike down the administration’s use of broad-based tariffs under the International Emergency Economic Powers Act (IEEPA) temporarily brought tariff relief. Still, the administration moved quickly to prevent a sharp rollback and remains firm on using tariffs as a negotiating tactic. However, as these new tariffs can only remain in place for 150 days, this could provide a potentially attractive off-ramp for policies that are directly contributing to elevated prices.
To be clear, it’s unlikely that tariffs will completely disappear over the medium term, as this has been a core policy priority for President Trump. It’s more likely that the administration delays or temporarily keeps tariff rates low in the short term to help address affordability. In fact, the Trump administration already appears to be moving in this direction. Despite continued noise, no new tariffs have been implemented since September last year. Moreover, a decision was made to roll back tariffs on hundreds of staple food products, including coffee, beef, and bananas, in November 2025.
Estimates suggest that the total cost of Trump’s tariffs averages $1,700 per household annually, skewed towards lower-income households. As a result, a temporary reversal of tariff rates would go a long way toward boosting consumption among these affected cohorts.
A dialing back of tariff rates should also lead to higher growth and lower inflation, while the easing of trade tensions and removal of uncertainty could also boost business investment and help firm up labor demand. With Federal Reserve estimates suggesting that tariffs boosted PCE inflation by 0.5-0.7 percentage points last year, a reversal of some of this impact is expected. Moreover, as the Federal Reserve expects the inflationary impact of tariffs to peak by mid-year, a trade policy pivot could potentially lower the hurdle to additional rate cuts in the latter half of 2026, helping with affordability on the margins.
Housing
Housing affordability is a focal point for many consumers, especially because a home purchase is typically the largest financial commitment they will make and a key source of long-term wealth. Here, the affordability challenge has been quite acute: the median age of a first-time home buyer has risen to a record 40 years old as home prices are up more than 50% since early 2020.
The surge in home prices is primarily driven by structural supply shortages. As a result, policies that expand housing supply, particularly deregulation and others that encourage new construction, represent the most direct path to improving affordability. However, because zoning, land use rules, and permitting processes are typically controlled by state and local governments, sweeping federal action remains difficult.
While there has been some bipartisan movement to lower federal regulatory barriers and encourage states to ease zoning restrictions, these efforts remain limited. Most federal proposals lack the types of incentives—such as targeted grants, subsidies, or tax credits—that would meaningfully spur additional building activity. Finally, it faces a tough path to passage given a competing bill in the Senate.
On the demand side, the administration has proposed limiting institutional ownership of single-family rental (SFR) homes to reduce home prices. However, the effectiveness of such a policy would likely be minimal. Institutional investors account for only 2–5% of all SFR properties and less than 1% of the total housing stock, meaning any forced divestiture would have little impact on overall home prices. Moreover, institutional buyers typically do not compete directly with traditional homeowners; in many cases, they partner with homebuilders to finance new construction. Restricting these investors could, unintentionally, reduce housing supply rather than expand it.
The administration has also sought to lower borrowing costs by directing Fannie Mae and Freddie Mac to purchase $200 billion of mortgage-backed securities (MBS). The announcement has already led to a tightening in mortgage bond spreads of roughly 15–20 basis points. Yet this intervention remains modest relative to the nearly $9 trillion agency MBS market. As a result, the impact on mortgage rates—currently around 6.1% for a standard fixed rate loan—is likely to be only marginal.
While there may be potential to scale up this program, the current Federal Housing Finance Agency Director, Bill Pulte, has already poured cold water on the idea. Moreover, unlike the Fed’s Quantitative Easing program, a sustained increase in MBS bond buying would require these housing agencies to fund their purchases through unsecured debt issuance, potentially tightening financial conditions in other parts of the debt market.
Crucially, with mortgage spreads back to historic averages, what has kept mortgage rates elevated is the rise in Treasury borrowing costs since the pandemic. The 240 bps increase in the 10-year Treasury yield accounts for nearly all the 250 bps increase in mortgage rates since the end of 2019. As a result, so long as there are other issues—such as fiscal concerns or geopolitical noise—keeping overall borrowing rates elevated, any move to tighten mortgage spreads may only address affordability on the margin. The administration’s move to leverage government-sponsored enterprises (Fannie, Freddie, etc.) balance sheets may only do so much to control the bond market, as market forces will eventually exert themselves.
Consumer credit
Another manifestation of affordability pressures on household budgets is the rise in consumer credit delinquencies, driven primarily by missed auto loan and credit card payments. In response, the administration has turned its attention to credit card lending practices, with the President calling for a 10% cap on credit card interest rates for one year.
Although the path for implementing such a cap remains uncertain, the idea itself has some historical precedent. A bipartisan bill introduced in early 2025 proposed phasing in a 10% rate cap over five years, and lawmakers also debated a 15% cap during consideration of the CARD Act of 2009. While the administration’s support could revive interest in similar measures, Republican leadership has already signaled opposition, limiting the likelihood of near-term legislative progress.
Nevertheless, if a 10% cap were implemented, it would roughly halve average credit card interest payments, given that current rates hover around 22%. This would translate into an estimated $130 billion reduction in annual interest payments, equivalent to about 0.6% of yearly consumer spending (if the full amount were instead spent by consumers).
The benefits of this policy would be concentrated among lower-income households, as the bottom income quintile holds a disproportionate share of auto loan and credit card debt. Lower interest burdens in these categories would help alleviate some of the upward pressure on consumer credit delinquencies.
Because credit card debt sits low in the consumer payment hierarchy, any savings there are likely to be redirected toward higher-priority obligations such as auto loans, mortgages, or personal loans. FICO data show this hierarchy has been roughly stable over time—auto first, then mortgage, personal loans, credit cards, and student loans—and credit cards consistently rank near the bottom. Given that stress is already elevated for lower-income borrowers in auto loans, reduced credit card burdens could meaningfully flow “up” the hierarchy, especially as maintaining a car is essential for sustaining employment.
However, the potential downside of a 10% rate cap would likely outweigh any benefits. To remain profitable, card issuers would need to sharply reduce charge-offs and credit losses, leading them to restrict lending to only the most creditworthy borrowers. In the near term, delinquency rates could even rise as higher-risk borrowers face tighter limits or lose access to credit altogether.
Such restrictions would have significant implications for spending. U.S. consumers charge roughly $6 trillion annually on credit cards—nearly 30% of total personal consumption. A cap near 10% would make it uneconomical for lenders to serve a substantial share of borrowers. Industry leaders warn that as many as 80% of Americans could lose access to traditional credit card products, pushing many toward more expensive alternatives such as “buy now, pay later” loans or other unsecured financing. This shift would likely deepen the existing K-shaped divide among households, with lower-income households most affected.
In such a scenario, bank earnings would also come under pressure. Preliminary estimates from Wolfe Research suggest that the cap could reduce earnings per share by roughly 10% across the largest card issuers, which collectively account for more than 65% of outstanding credit card debt. A decline of this magnitude could weigh on capital buffers and introduce new financial stability considerations. Reflecting these risks, banks with significant exposure to card lending have seen their share prices fall about 4% on average since the proposal was announced, while the broader KBW Bank Index has remained flat.
Other measures that could improve affordability include the administration’s recent decision to delay the involuntary collection of defaulted student loans, such as wage or tax refund garnishment. There are about $140 billion in defaulted federal student loans currently outstanding, and roughly 4% of those balances are collected involuntarily each year. A delay in collection would free up $5.5 billion for consumers, likely most helpful to middle-income or younger consumers.
Healthcare
Healthcare is another major area where affordability challenges remain acute. Unlike other categories, these pressures have persisted for years, and meaningful fixes appear categorically difficult to achieve.
The Trump administration’s recently released Great American Healthcare Plan offers a high-level framework for addressing some of the structural drivers of rising healthcare costs. The proposal aims to formalize agreements with pharmaceutical companies to lower drug prices, reduce insurance premiums by cutting out intermediaries and providing targeted subsidies, and increase price transparency across insurers and hospitals.
However, the plan lacks detail—the full document spans just one page—and several components appear more symbolic than substantive. For example, recent agreements with drugmakers have not produced any measurable price reductions; in fact, many companies have raised prices this year. With limited momentum behind another reconciliation package in Congress, the plan faces significant legislative hurdles.
There are, however, additional policy avenues under discussion. Lawmakers are exploring a potential compromise to extend the enhanced Affordable Care Act (ACA) subsidies that expired at the end of 2025. These subsidies had helped lower-income households afford ACA marketplace premiums.
Without the subsidies and alongside higher underlying insurance premiums, ACA costs are projected to jump sharply. Average premiums are expected to rise by about 114%, placing a disproportionate burden on lower-income enrollees, for whom these premiums can represent 2–4.5% of annual income. At the aggregate level, the expiration of subsidies is projected to reduce disposable household income by roughly $24 billion, equal to about 0.11% of annual consumer spending.
Despite bipartisan interest in mitigating these pressures, passing an extension remains challenging. The legislative window is narrowing as Congress shifts attention to other priorities, leaving the outlook for any near-term relief highly uncertain.
Many of the administration’s key affordability proposals require Congressional action. Given the narrow Republican majority, securing the necessary votes will be challenging. The legislative window is also tightening. Although the midterm elections are not until November, meaningful progress on anything beyond essential items, such as the September 30 government funding deadline, will likely slow by early summer as lawmakers leave Washington to campaign.
Beyond legislation, the administration can pursue certain price-focused initiatives through regulatory channels. These include efforts to enhance consumer-facing price transparency through the Consumer Financial Protection Bureau, to advance hospital or drug pricing disclosure rules, and to accelerate energy production permitting. While these measures can have targeted effects, their narrower scope limits their ability to reduce costs at a broad scale.
More uncertainty surrounds the potential use of less conventional executive tools. The administration has previously tested the boundaries of executive authority, and with a closely divided Congress, it may again rely more heavily on administrative action to advance policy goals. In addition, political pressure on firms—an approach that has occasionally influenced corporate behavior in the past—may also play a role, particularly given companies’ heightened sensitivity to avoiding public confrontation with the President.
Summary of possible affordability proposals
| Focus Area | Policy Proposal | Authority Required |
|---|---|---|
| Trade | Reduce Existing Tariff Levels | Executive |
| $2,000 Tariff Refund Checks | Congress via reconciliation | |
| Housing | Housing De‑Regulation (zoning, permitting) | Congress |
| Nationwide Ban on Institutional Investors | Congress | |
| Allow GSEs to buy MBS | Executive | |
| Consumer Credit | Limit Credit Card APRs at 10% | Congress; Political pressure |
| Pause Defaulted Student Loan Wage Garnishment | Executive | |
| Tighter CFPB Enforcement of Fees/Price Transparency | Executive | |
| Healthcare | Lower Drug Prices | Congress; Executive |
| Lower Insurance Premiums via PBM Reform | Congress via reconciliation | |
| Price Transparency | Executive | |
| Extend ACA Subsidies | Congress via reconciliation | |
| Other | Energy Permitting/Leasing | Executive |
The State of the Union made clear that the administration views affordability, particularly for lower-income households, as a central policy priority. Yet most of the major proposals under discussion require Congressional approval, which remains difficult given narrow majorities and competing legislative priorities. While certain regulatory actions could help reduce specific costs at the margin, their impact is likely to be limited.
Because the policies mostly target lower-income households, who account for roughly 35% of total consumer spending and whose share has declined in recent years, the overall macroeconomic effect of these measures is likely to be modest. As long as higher-income households, which drive the bulk of consumption, remain resilient, aggregate economic activity should continue to hold up.
Additionally, given that the effects of the One Big Beautiful Bill and the lagged impact of last year’s Fed rate cuts are still filtering through the economy, there is a foundation for growth even without major new affordability initiatives. Against that backdrop, any additional policy tweaks are likely to deliver only incremental gains.
Nevertheless, investors should remain alert to the possibility of unconventional policy approaches. The administration has increasingly emphasized its anti-establishment and anti-globalization stance—positions that resonate with parts of its base—and such framing could open the door to populist measures with uncertain long-term consequences. To the extent that affordability becomes a political vehicle rather than a narrow economic objective, market participants should remain vigilant about policies that may generate short-term benefits but undermine the efficient allocation of capital over time.
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