Just days after the latest Fed meeting concluded, we have a new Fed chair in former Fed governor Kevin Warsh.
Warsh previously served as a Fed governor from 2006 through 2011, the youngest in history, and resigned that March because he was opposed to a second round of Quantitative Easing (QE).
In short, he has historically been opposed to zero-interest rate policy and mass asset purchases, such as those made through several rounds of QE.
And is largely known as a “hawk” when it comes to monetary policy, meaning more likely to be opposed to rate cuts to protect against further inflation.
As such, chances are mortgage rates will be higher under Warsh all else equal. Though perhaps he is a changed man.
Mortgage Rates Are Driven by Economic Data
First things first, let me remind everyone that mortgage rates are driven by economic data, not the Fed.
The Fed simply adjusts its short-term rate, the federal funds rate, in light of economic data at their disposal.
So the Fed doesn’t really dictate mortgage rates. It generates monetary policy based on the data, which can correlate with longer-term rates.
But again, it’s the data, such as inflation data from CPI reports and labor data from the monthly jobs report that ultimately matters.
To that end, on Wednesday current Fed chair Powell said, “The upside risks to inflation and the downside risks to employment have diminished, but they still exist.”
“So there’s still some tension between the mandates.”
“We think our policy is in a good place.”
In other words, Powell basically reinforced the idea that additional rate cuts might not be necessary, nor any hikes either.
Basically, we’re in a decent spot where policy isn’t too loose or restrictive after years of it being too loose.
Followed by a few years where it was arguably too restrictive to contain out-of-control inflation.
Newly nominated Kevin Warsh would likely pick up where Powell left off in this regard, being a more conservative personality opposed to unwarranted loosening.
That’s why it’s kind of an interesting pick from President Donald Trump as he doesn’t seem easily swayed by politics.
Warsh Was Opposed to QE and Rate Cuts In the Early 2000s Housing Crisis
During the early 2000s housing crisis and Global Financial Crisis (GFC), Warsh was opposed to “large-scale asset purchases and near-zero benchmark interest.”
And was known as both a hawk and a “Fed critic” for the way they handled that crisis by purchasing Treasuries and later mortgage-backed securities (MBS) to drive down interest rates.
That saved the housing market via record low mortgage rates that arguably boosted property values and prevented an even bigger crisis.
Scores of Americans were able to refinance their mortgages into these ultra-low rates to reduce their payments and make staying in the home more attractive.
But there’s an argument that this simply kicked the can down the road, while also making the can even bigger.
Instead of letting the housing market stand on its own, and perhaps collapse even harder, we propped it up via this accommodative monetary policy.
So will Warsh continue to hold this view today? Is he still opposed to asset purchases and QE and low interest rates?
Chances are the answer is yes, which might contradict what Trump wants; low rates!
Mortgage Rates Likely Won’t Get Any Special Assistance from the Fed Under Warsh
The takeaway here, assuming Warsh isn’t a changed man, is to not expect any special help from the Fed.
If you want lower mortgage rates, you’re going to need to look elsewhere.
For example, Fannie and Freddie buying MBS is one such way to get lower mortgage rates, but it pales in comparison to another round of QE.
It’s a drop in the bucket. That’s why we only saw 30-year fixed rates drop about .125% to .25% on that news.
If the Fed has zero intention of buying MBS again, don’t expect another move back to the 3-4% range for the 30-year fixed.
The only way to get mortgage rates noticeably lower would be via weakening economic data, such as lower inflation and/or weaker labor.
The “good news” on that front is labor seems a lot shakier than Powell has indicated in his latest press conference.
I use good news in quotes because it’s actually bad news if unemployment spikes higher and mortgage rates fall.
Sure, it helps if you’re still gainfully employed and can afford to buy a home. Or if you still have a job, currently own a home, and want to take advantage of a rate and term refinance.
But it would be bad for the wider economy and the housing market, potentially leading to falling home prices again.
So with Warsh at the helm, we might have one less potential path to significantly lower mortgage rates.
And ironically, some might miss Powell when he’s gone if Warsh turns out to be even more hawkish than his predecessor.
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