Industry executives, brokers, and historians weigh in on the challenge ahead for Warsh
Kevin Warsh was sworn in as the 17th chair of the Federal Reserve in a ceremony at the White House on Friday afternoon. Warsh succeeds Jerome Powell, who remains on the Fed board and has served as chair since 2018.
As Warsh takes over, he faces a 10-year Treasury rate similar to when Ben Bernanke took over on Feb. 1, 2006, when the rate was 4.57%. The last two Fed chairs saw much lower rates when they took over. The 10-year was 2.61% when Janet Yellen was sworn in as chair in 2014, and it was 2.77% when Powell took over in 2018.
Much of the mortgage industry is cautiously optimistic that a new and much different voice leading the central bank could lead to not just lower rates, but much more stable rates.
Alex Elezaj, EVP and chief strategy officer at UWM, said it’s going to be a challenge for Warsh to navigate the current market conditions, but Elezaj thinks Warsh is up for the job.
“It’s going to be challenging, obviously,” Elezaj told Mortgage Professional America. “I think it’s a great move. He’s a smart guy with a great background. I think he’s going to do a great job. Who knows what’s going to happen, but hopefully, he sticks to what is really needed, which is taking some of the political stuff out of it. Just say, ‘Here’s the economic condition. This is where unemployment is. This is where inflation is. What do we need to be doing?’”
Hoping for rate cuts
Elezaj and many brokers across the country are hopeful that Warsh will follow through with what President Donald Trump has tasked him with, which is to cut interest rates.
“Many smart people look at the situation and say interest rates should definitely be down 100 basis points,” Elezaj said. “You can even argue 200 basis points, but I would say at least 100 basis points. When you compare it to the world in different economies and where rates are, we just have very high rates right now. The numbers and the metrics would lead you to believe that rates should be a lot lower than they are. So hopefully, he can execute on some of that stuff.”
Barry Habib, founder and CEO of MBS Highway, is another industry leader who is excited about the change in leadership at the Fed. He believes that Warsh will look at things differently than Powell. However, he doesn’t believe that automatically means a rate cut is ahead.
“This man is an expert in understanding the financial markets,” Habib said. “He also understands the Fed because he worked at the Fed in the mid-2000s. He helped us navigate through the financial crisis. This is about as great a Fed chair choice as we could possibly have. Will he cut rates? He will cut rates if it’s appropriate. Will he hike rates? He will hike rates if it’s appropriate.
“What will he rather do? He will rather cut rates. And one of the things he wants to do is, unlike Jerome Powell, who was data-dependent and looked in the rearview mirror rather than looking through stuff, is to look through all of that.”
One way Habib predicts that Warsh will change how the Fed looks at inflation data is by using something called the “trimmed mean.” Habib explains it as a weighted average of price changes, which removes the highest 31% and the lowest 24%. He said it will filter out one-time price shocks and help eliminate Fed overreaction.
“You ever watch the Olympics, and they got all the judges, and they get the high score and the low score, and they eliminate those? This is the same concept,” Habib said. “This gets rid of the outliers. This will filter out a lot of those things and will prevent the Fed overreactions that you get constantly.”
Change won’t be easy
While there is industry optimism that Warsh can shake things up, the Federal Reserve isn’t a one-person show. The Federal Open Market Committee, which makes rate decisions, is made up of 12 members, and one of those members, for now, will be the former chair, Powell.
The recently released notes from the last FOMC meeting showed several members believing that a tightening of policy, which leans more toward rate hikes rather than cuts, might be more appropriate going forward.
Nicolas Jabko, a political science professor at Johns Hopkins University, has spent years studying the internal politics of central banks. He believes Warsh will have his work cut out for him to convince the other FOMC members to cut rates.
“He’s only one vote on the committee,” Jabko told Mortgage Professional America. “He needs to basically sway the entire committee his way if he wants to lower interest rates. And he may have a lot of trouble doing that because of the new inflationary pressures.”
While the existing members of the FOMC may be reluctant to cut rates, Jabko notes that members typically go along with the plan set forth by the Fed chair.
“The chair of the Federal Reserve … it is a hierarchical organization. It’s a strange organization,” Jabko said. “It’s collegial in the sense that the Fed chair only has one vote in the FOMC vote at the end. So he’s supposed to express and steer the consensus of the Fed. But at the same time, there is a tradition of deferring to the chair.
“So when the chair wants something, especially when he’s just been appointed, as is the case here, it may be difficult for the other FOMC members not to go in the direction that the chair wants.”
Jabko is hopeful that Warsh will use all of the resources at his disposal when setting a course for the central bank.
“He’s been at the Fed before. He knows how the institution works,” he said. “Hopefully, he will take advice from the staff, the many economists who work on things, and that he will not completely brush them aside. If they tell him that what he’s trying to do is potentially dangerous, he may listen to them a little bit more now that he’s the chair.
“Clearly, he doesn’t need to please Trump as much as he did before. So that’s why I’m saying it’s anyone’s guess. He may very well be a very classic type of chair who cares mostly about inflation and who pretends to listen to Trump, but in fact cares mostly about monetary stability and fighting inflation.”
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