Trump’s New Fed Pick Could Raise Interest Rates, Defy Expectations

Dave:President Trump just nominated Kevin Warsh to replace Jerome Powell as fed chair, the most consequential fed leadership change in over a decade for real estate investors because the direction of the fed and monetary policy in general has massive impacts on the real estate industry. And this announcement has everyone wondering, will a new Fed chair finally bring down mortgage rates and lending costs or is this just another false hope today and on the market? We’re digging into what a new Fed chair means for the real estate investing industry. And I’m telling you now, my take is probably going to surprise you because all the commentary I’ve seen about this so far is missing the critical variable that’s going to tell us where we’re really heading.Hey everyone, welcome to On the Market. I’m Dave Meyer, chief Investment Officer at BiggerPockets. And by the way, if you’re watching this on YouTube and wondering why I’m wearing a full winter coat and outfit right now because my heat went out two days ago and can’t get a tech out here until tomorrow, but the show must go on. So this is the way we’re recording today anyway, you’ve probably heard this news by now, but last week there was a major announcement from the White House President Trump announced his pick to replace Jerome Powell as the chairman of the Federal Reserve. When Powell’s term is up this coming May, Trump has made no secret of his contempt for Powell, who as a reminder, Trump actually appointed himself to the position in 2017. But the two have had major differences of opinion on monetary policy of late and hearing that Trump plans to replace Powell is no big surprise.In fact, Trump has been publicly floating a bunch of different candidates for the position for months and as of last week we learned his choice will be Kevin Warsh. Warsh will be taking over the Fed at a critical time. Borrowing costs remain high, the labor market is sending mixed signals. The dollar is in decline and inflation is running above target levels and the way which Warsh chooses to prioritize these various issues and the ways in which he steers monetary policy is of course of national importance. But it also has outsized impact on the real estate industry in general because as you know, our industry is heavily dependent on debt and borrowing costs. So in today’s episode we’re going to look at Warsh, who he is, what he stands for, and critically how he’s likely to influence monetary policy as the chairman of the Federal Reserve.And lemme just tell you right now, this isn’t just about the federal funds rate or whether he cuts rates once or twice next year. We’ve seen for years that’s not necessarily going to move mortgage rates, so we’re going to go beyond just the federal funds rate to understand how Warsh might use some of the Fed’s other tools going forward. And of course, we’re also going to extrapolate as much as we can and discuss how Warsh’s nomination should impact your investing decisions. Here we go. First, we do talk a lot about the Fed on the show, but we should just review what they actually do. The Federal Reserve is the government agency responsible for setting monetary policy in the United States. They set interest rates, they regulate banks. They decide if we’re doing quantitative easing or tightening. That’s basically their job. They are not responsible for what is called fiscal policy, which is how money is spent in the United States.That power goes to Congress. Now when it comes to the main thing people associate with the Fed, which is setting interest rates, they actually have but one tool they can change the thing called the federal funds rate. It’s a little bit complicated, but it’s basically setting the cost for banks to borrow and lend to one another and it sets the baseline lending rate for most other interest rates in the economy. So it sort of serves as this baseline that every other type of loan, whether it’s mortgages or car loans or credit cards, they’re sort of based on this in one way or another, but they do not directly set any other interest rates. The Federal Reserve does not set mortgage rates. They do not set credit card rates. They set the federal funds rate and then lenders use that to inform their own decisions about how they’re going to set rates.Now, despite this just being one interest rate, it is a very powerful tool like setting the federal funds rate is a major lever in the economy, but it’s not the only one. And as we’re going to talk about a little later, they also have some other tools that aren’t setting interest rates. These are tools that people often overlook, but I personally believe are probably the most important thing for investors to be thinking about right now. Anyway, for now, what you need to know is the Fed controls the federal funds rate, but it is not actually directly controlled by the Federal Reserve chair. That is not how this works. There are actually 12 voting members on the FOMC, which stands for the Federal Open Markets Committee. This is when they say there’s a fed meeting this month. That is the FOMC meeting. There are 12 voting members, the Fed chair, AKA right now, Jerome Powell, it will be Kevin Warsh starting in May does not unilaterally decide on monetary policy.There are votes during every FOMC meeting and that is how monetary policy is set. So that for now is basically what you need to know about the Fed. Let’s turn our attention then to why the change. Why is Trump replacing Jerome Powell who he appointed himself back in 2017 with someone else? Well, if you’ve been paying attention to the news, you know that Trump, especially in his second term, has been very critical, very publicly critical of Powell’s performance and some of that, to me at least is fair given the hindsight that we have. I think almost everyone agrees the Fed kept interest rates too low for too long and that was a major factor in the inflation we’ve seen and continue to see. There are other factors, of course, massive stimulus packages, three of them to be exact supply side disruptions during COVID and quantitative easing being other major contributing factors as well.But you have to think that low interest rates, looking back on it now, definitely played a major role on that. On the other hand, I must say not all of the blame should go on Jerome Powell. In my opinion, he is one of 12 voting members and as the chair, yeah, he’s the face of the decisions of the Fed. But the monetary policy failures of 2021 and 2022 in my opinion should be shared across all the voting members of the FOMC. But anyway, back to today, Trump now feels that Powell is overcorrecting having waited too long to raise rates. Trump and many of his supporters feel that rates should be coming down faster to help stimulate the economy. Trump himself has even gotten so far as to say that he thinks the federal funds rate should be 1%, which would be pretty unheard of outside of extreme economic emergencies like COVID or the great financial crisis.Just as a benchmark, in normal times the federal funds rate is more likely in the two to 4% range. That’s kind of the sweet spot that keeps the economy humming and doesn’t risk unemployment or recession, but also prevents the economy from overheating and causing inflation. Now, Powell of course, has defended the Fed. He’s saying that they are trying to balance the labor market which would support lower rates with battling inflation, which would say keep rates higher and they’re taking a meeting by meeting data driven approach. Trump, as you know, disagrees and is exercising his right as the president to nominate a new Fed chair in May when Powell’s term expires and he has chosen Kevin Warsh. So who is Kevin Warsh and what does he believe and what does it mean for real estate investors? We’re going to get to that right after this quick break.Welcome back to On the Market. I’m Dave Meyer talking about President Trump’s announcement that he’ll be nominating Kevin Warsh for senate confirmation when Jerome Powell’s term expires in May of 2026. So who is this guy? Who is Kevin Warsh? Let’s learn a little bit about him and learn what we can about what might be coming for mortgage rates and for our economy in general. Kevin Warsh comes from a pretty prestigious background. He went to Stanford University and Harvard Law School. He’s had a long career. He’s actually still relatively pretty young, but he’s been in his career in finance for a long time. He worked at Morgan Stanley. He was on the National Economic Council for George W. Bush and he was the youngest ever fed governor at the age of 35 and critically he served as a Fed governor from 2006 to 2011. So he was there during the great financial crisis.He has crisis experience, which to me counts for a lot more recently. He has been working in the private sector and obviously we don’t know what Warsh will do and what his legacy is going to be at the Fed, but in my opinion, he is a qualified candidate to lead the Fed and he has strong credentials. Now, reading his resume is one thing, but you probably all want to know what Warsh actually believes and what he said about the current interest rate environment and the current economy because that’s going to tell us where he might try to steer the Federal Reserve in coming years. And again, just want to caveat, we don’t actually know what’s going on. We don’t know what Warsh wants to do. We don’t know what he’s talked to the president about before his appointment and we don’t know how data and conditions in the market will change between now and May.It’s February right now. A lot could change in the economy in the next two or three months. But that said, we do know a bit based on his previous statements and there’s a good amount that we can extrapolate. Historically, war has been a pretty hawkish voice in fed circles. You probably hear that term a lot hawkish. That word is used to describe people who favor tighter monetary policy, which is just another finance word for higher interest rates. So warsh historically has favored higher interest rates because he wants to control inflation. He prioritizes that. At the same time, he’s also been a very vocal critic of the fed’s bond buying program known as quantitative easing. He has said that too causes inflation. So from those two statements, you would think he will vote to keep interest rates high. But in recent months, wars has shifted his stance on the economy and monetary policy considerably.He’s actually started arguing for lower rates, telling Fox News that cutting rates could set the economy up for its next degree of acceleration. His argument goes a little bit like this. He says Inflation isn’t caused by the economy growing too fast. It’s caused by the government spending and printing too much money. He also believes AI driven productivity gains will allow strong growth without undesirable inflation, which could justify lower rates. And to me, at least from an economics theory perspective, those are both reasonable arguments. We don’t know for sure. I mean, I do think that the economy can overheat and cause inflation, but I also think in recent years, government spending and printing has also contributed to inflation. I don’t think it’s one or the other. I think both have contributed to it. I’ve also heard this argument a couple times now that AI driven productivity gains will allow strong growth without inflation, which I think is a credible idea.We just don’t know, right? All this AI stuff is super TBD, we just don’t know what’s going to happen, but the theory of sound, if there are productivity gains, you can have growth without inflation. I do buy that. We just don’t know how, how big those productivity gains will be and if they’ll actually offset any potential inflation. So in theory can work. Will it work? We don’t know. He does lose me a little bit when he starts talking about mortgage rates. He actually said quote, we can lower interest rates a lot and in doing so get through to your fixed rate mortgages so they’re affordable so we can get the housing market to get going. Again, quote, maybe he’s right, but in recent years we’ve seen that the federal funds rate and mortgage rates have become uncoupled. Sometimes they move together, other times they don’t.In the last couple of years they have not. Now, I do believe that if they lowered the federal funds rate a lot, if they cut it another full point or two points, we’ll probably see rates come down a little bit. But by how much remains to be seen and very critically, he has said something really important. Wars has also said something other than cutting the federal funds rate something that might actually raise mortgage rates. Yes, raise mortgage rates. I mentioned this earlier, but I want to dig into this a little bit. Warsh has repeatedly criticized something called quantitative easing. You’ve probably heard me talk about this on the show before. Quantitative easing is the fed’s program to buy US treasuries and mortgage backed securities. They go out and rather than other investors buying those treasuries or bundles of mortgages, the Fed actually goes and buys them and they do this by making money out of thin air.Seriously, that’s actually what they do. They just go out and they buy mortgage backed securities or bonds and they just wire money to the seller that is poof created digitally and magically appears in the seller’s bank account and that money never existed before. That’s actually how quantitative easing works. And Warsh believes this causes inflation and I must say I agree, this is adding to monetary supply and that has a lot of upward pressure on inflation. Now, quantitative easing can work. I actually think if you look at the role it played in the recovery from the great financial crisis, it was really helpful. It was something that we actually needed. The problem is we got addicted to it. We’ve been doing quantitative easing during non-emergency times, and I personally think it’s contributed to a lot of inflation recently and it’s got to be one of the top, maybe one, maybe two major reasons.Housing affordability is so strained. I mean supply side stuff is the other reason, but supply side stuff, quantitative easing together, keeping mortgage rates artificially low, pumping more money into the economy, major reasons why we have housing affordability problems. So needless to say, I am not a fan of quantitative easing outside of emergency situations, and apparently neither is Warsh. Warsh himself has said he wants to shrink the fed’s balance sheet. They’re currently holding over $6 trillion in assets. That is a lot. And so if he shrinks the balance sheet, this could help fight inflation because actually when they do this, when they shrink the balance sheet instead of being quantitative easing, that is called quantitative tightening. And what they do, this is real. What they do is when they sell that asset and they get the money from the seller into their bank account, they just delete it seriously.They just get rid of the money, they create it out of thin air and then they get rid of it. It just goes poof into the ether. And this really can help fight inflation because you actually see monetary supply starting to go down. That’s a good thing for inflation, but it also has a direct impact on bond yields and mortgage rates. This could push rates up because we’ve gotten addicted to quantitative easing. A lot of the demand for mortgage backed securities and treasuries over the last couple of years has come from the Federal Reserve. And if so, they’re no longer buying and not are they no longer buying? They’re becoming sellers. There can be a glut of supply coming on the MBS market and the treasuries market, and that can push up rates. So just keep that in mind as we move on as to what this means for real estate investors is that this could be good for inflation, which I should say will be beneficial for mortgage rates in the long run, but in the short run it could have that adverse effect on mortgage rates.Last thing I’ll say before we move on is I think one question I keep hearing about warsh is has he really had a big change of heart because for years he was very hawkish, he favored tighter monetary policy. Does he really believe that or has he shifted his stance to align himself with the president’s view of what monetary policy should be? It’s an open question. We don’t know. We shall see. We do have to take one more quick break, but when we come back, we’re going to talk about what this all means for real estate investors and how you should be thinking about your own portfolio as we prepare for this major shift in the Federal Reserve.Welcome back to On the Market. I’m Dave Meyer. Today we are talking about Kevin Warsh’s nomination as the Fed Chair. Now he does have to be confirmed by the Senate. I should mention that, that President Trump can’t just unilaterally decide this is going to be the Federal Reserve chair. It does need to be confirmed by the Senate. My guess is that Kevin Warsh will be confirmed. He is a qualified candidate. I am sure some people will object, but my guess is he will be confirmed. What then does it mean if Warsh is going to be confirmed? Well, I just want to remind everyone before we get into this is that regardless of what Warsh wants, it’s not really all up to him. As a reminder, he’s just one of the votes. He doesn’t unilaterally decide the federal funds rate or whether we’re going to do quantitative easing or quantitative tightening.He is one of 12 votes, but obviously the most vocal and public vote and he is the leader. He could start steering the other members of the voting committee towards policies that he’s in favor of. But that said, he is inheriting a very divided F right now. The FOMC is more divided than has been in years. Actually for a long time during COVID, people were voting pretty unanimously. There was rarely dissenters for the overall policy that was being proposed. But over the last couple of cuts, you see it used to be zero dissenters, then it was one, then it was two, now it’s three. You see more and more people diverging on what they think the Fed should be doing. And so worship is going to be coming in with a divided fed. Now as of the last meeting, the projection is just for one more rate cut in 2026, then one in 2027.As it seems that the majority of voters right now feel that we’re close to what is called the quote neutral rate, you might hear this term thrown out a lot in the financial media right now. Neutral rate is basically where the Fed wants to be. They want to find a federal funds rate where they don’t need to be changing it very much. It’s just what the funds rate should be. It’s something that’s low enough to keep the economy humming and job growth, wage growth, GDP, growth, all that, but also high enough to prevent inflation. So as of now, even with this, I just want to remind everyone not to expect too many rate cuts in the coming year. And also to remind you that frankly for most real estate investors, the people who listen to this podcast, the federal funds rate cuts don’t really mean that much, especially on the residential side of things.Residential mortgage rates, like I said, they’ve been sort of decoupled, probably not going to do that much either way. I am personally sticking with my mortgage rate predictions that I made at the end of last year in November, and I just don’t think they’re going to move that much this year. I’ve said I think they’re going to remain between five point a five and six point a half percent, probably average somewhere near six 6.1%. Maybe they’re down a little bit lower than 6.1%, but I don’t think they’re going below 5.5% in 2026. I’m sticking with that. Now, the one bright spot here though is the federal funds rate is more closely tied to commercial real estate loans. So if you’re in multifamily or office or retail, that’s good news. You are going to see rates start to come down for commercial loans and that could really help an industry that has frankly crashed in a lot of places and is struggling a lot.So I am gear most of our episodes here on the market towards the residential market. That’s mostly what the BiggerPockets community is, but many of us, myself included, invest in the commercial real estate market and I just want to call out. That’s good news if the federal funds rate comes down. Now, the only way we really see big changes in residential mortgage rates from the federal funds rate coming down is honestly, I think if they get too aggressive. This is all a game. As you all know, the economy, a lot of it is just confidence and what people believe. And if the Fed loses credibility and people start to believe that wars and the Fed Governors are lowering interest rates quickly for political reasons or to provide short-term bumps to the stock market at the expense of long-term inflation risk, it’s going to have an adverse effect.This is what we’ve seen the last couple of times when there have been rate cuts. A lot of bond holders think rate cuts are coming too fast. Bond holders, as we talk about on the show all the time, they hate inflation. It is their arch enemy. Inflation is the worst enemy of a bond holder because it devalues the interest payments they get on those bonds over time. And so anytime they are fearful of inflation, they’re going to sell bonds which pushes mortgage rates up. And so if they think, oh no, the Fed is lowering rates too quickly, maybe that will help stuff in the next year, but I’m holding a 10 year bond and inflation’s going to be bad for a lot of those 10 years, they might sell and rates might go back up. So I think that’s the risk. But I don’t think given who war is just given his reputation, maybe he has changed a lot, but given his reputation, I don’t think we’re going to see super aggressive federal funds rate.But if we do, in my opinion, that’s a red flag. Now, we’ve talked about the federal funds rate, but like I said, I don’t think that’s a huge deal one way or another because it’s not going to impact mortgage rates so much. To me, the big question is what he does or what he tries to do with the balance sheet. Remember that’s whether he decides to do quantitative easing, quantitative tightening or nothing. If war and the Fed reduce the balance sheet, that’s quantitative tightening, remember making that money that they gave out and made out of thin air, it’s just evaporating it, right? It’s good for long-term inflation, but it will put short-term upward pressure on mortgage rates. Now, could that be offset by federal fund rate reductions? Maybe things will stay flat. Of course, it’s going to just depend on how aggressively he tries to reduce the balance sheet if he tries to do it at all.My guess, and this is just a guess guys, I obviously don’t know what’s going to happen, but I’ve been doing research all weekend trying to figure out who this guy is, what he might do my most as an analyst. My job is to figure out what the highest probability thing is, and I have a pretty good track record of it. I’m not always right. And this one is a big question mark, but I’ll just tell you what I think will probably happen is I think he’s going to try and do both. I think he is going to try and steer the Fed as much as he can because remember, he only gets one vote. He’s going to try and lower the federal funds rate. This will probably help the stock market, it will help commercial real estate. But he’s also going to advocate for selling bonds and mortgage backed securities because if he is who he is still and he is fearful inflation and he wants tighter monetary policy, he can potentially lower the federal funds rate that can stimulate the economy, but increases the risk of inflation.Meanwhile, if he does quantitative tightening at the same time, that offsets some of that inflationary risk and maybe we will get economic stimulus without the fear of inflation. Now, I don’t know. This has never been done before. We have never seen a falling federal funds rate with quantitative tightening at the same time we haven’t. So we don’t know what will happen. But if you watch his interviews, which I have, it does seem like this is kind of where he’s heading, lower the federal funds rate to put downward pressure on mortgages, sell MBS get some upward pressure on mortgage rates. Maybe they offset each other and we have neutral mortgage rates, but we get stimulus for the economy without additional inflationary risk. That seems to be what he believes. We’ll have to see if that actually happens. One more thing I want to mention is quantitative easing.I actually said in November, I think it’s on the table in 2026 because Trump really wants lower mortgage rates. Now, I stand by the idea that we cannot get significantly lower residential mortgage rates without quantitative easing, at least this year. As I’ve said many times, the federal fund rate doesn’t control mortgage rates. Quantitative easing will lower mortgage rates in the short term. It will probably increase mortgage rates in the long term, which is why I am not in favor of it. But I do still think there’s a chance that this happens, but that probability has probably declined. If we were to believe Warsh and take him at his word last year, I said, I thought there was about a 30% chance that we’ll get quantitative easing this year. I’d say it’s like 10 to 15% now maybe even lower because Warsh seems really against this, and I kind of believe him on that.He has repeatedly indicated he wants to do the exact opposite quantitative tightening, not quantitative easing, which means higher mortgage rates in the short term, but maybe better for the housing market in the long run because we won’t have that inflationary risk and that reduces the risk that mortgage rates are going to go up in the long term. So that’s where I come out on all this. Obviously, we don’t know exactly what’s going to happen, but this is what we know so far, and I think for you as investors as well as me, what we need to know. Just to summarize this, is Trump has picked a qualified candidate with a strong track record. And what we don’t know what it’ll do. I still think a big reduction in mortgage rates are unlikely. I see a lot of people on social media touting this announcement and saying, mortgage rates are coming down.War City is going to lower the federal funds rate. Do not buy into that. I still think it is very unlikely mortgage rates come down because without quantitative easing rates are going to stay in the upper fives to mid sixes this year. And the only way we get better affordability is the slow, boring, frustrating way with gradually lower rates flat to correcting real home prices and wage growth for investors. This really just means that you do not want to wait till May thinking there will be lower rates. It is unlikely they will fluctuate. They might go down a little bit. I think they will go down a little bit over the course of the year. But if you’re waiting for Warsh to come in and his first day and thinking, oh, there’s going to be lower mortgage rates that day, I don’t think that’s exactly what’s going to happen.And if it does, they’ll probably go back up the next week. So the best thing you can do is what we talk about all the time on the show, which is look for deals that work. Now, if rates go down in the future, that’s great, that would be really nice. But there are deals that work now, and you should just spend your time looking for those instead of hoping for something is going to change in the future. I’ve said it before and I’ll say it again, the Fed is not coming to save you. You have to go find deals that work in this market. That’s the job, and we’re here to help you do it twice a week on the market. Thank you all so much for listening. Make sure to give us a, like if you’re watching this on YouTube or share it with a friend, if you think it will help them make better investing decisions, it really helps us out a lot. I’m Dave Meyer for BiggerPockets. I’ll see you next time.