With a rate increase now more likely than a reduction, one broker says the Fed rarely gets it right anyway
For some brokers and mortgage market watchers, Kevin Warsh’s arrival as Federal Reserve chair last week was the sign they’d been waiting for that lower interest rates are finally on the way.
Warsh, who was sworn in as the new head of the central bank on Friday, has widely been viewed as more receptive than his predecessor Jerome Powell to President Trump’s insistence that the federal funds rate should be much lower.
But with the Iran war continuing to stoke inflationary fears, markets view little chance of big cuts by the central bank in the months ahead – and the CME FedWatch Tool, a gauge of market expectations toward the central bank, even sees a 70% likelihood of at least one rate hike before the end of 2026.
Key inflation data will arrive on Thursday, with the personal consumption expenditures price index expecting to surge even higher.
Warsh isn’t the only Federal Reserve official with a say over its next decision (scheduled for June 17). Eleven other Federal Open Market Committee (FOMC) members, including the seven members of the Board of Governors and four of the 11 remaining Reserve Bank presidents, vote on every rate decision.
And a further inflation upsurge likely wouldn’t convince many of those voters that the rate cuts the president has been angling for would be the right call.
Why Warsh can't go it alone
“Kevin Warsh can have an effect. But he’s got to convince other Fed presidents that are voting members that [a cut] is the right thing to do,” Nick Barta, division president at Security First Financial, told Mortgage Professional America.
“While he’ll wield a good amount of influence, he’s still got a whole committee that has to make that decision.”
Inflation pressures and spiking costs were the justification for a series of rapid rate hikes by the Fed in 2022 and 2023, and while it’s lowered rates slightly since then, Powell and other decisionmakers have preferred a cautious “wait-and-see” approach in recent months amid economic turmoil, tariff chaos and the outbreak of the Iran war.
Barta, though, sees the central bank’s approach over the years as consistently the wrong one. “My opinion on the Fed is that if they stayed out of the way, we would all be in a better spot because when they’re too accommodative, they create inflation pressures. When they’re too restrictive, it creates problems for the average consumer,” he said.
While markets might be bracing for a rate hike in the months ahead if inflation pressures persist, Barta said that would be the wrong step.
“In a market like today where inflation is affecting groceries and gas and what people need to feed their family… I just don’t see how raising rates makes it easier on the average American,” he said.
“It’s not going to slow down their spending on milk and eggs and gas and the things that they need. Those are constants. It doesn’t matter whether we raise interest rates or not.”
Mortgage rates don’t rise and fall directly in tandem with Fed decisions, although markets are strongly influenced by their expectations of how the central bank will move in the near future.
If expectations around a hike solidify further, that could push mortgage rates – which have already soared to their highest level since last August, according to the Mortgage Bankers Association (MBA) – even higher.
The rate hikes that could 'wreck the market'
Since his confirmation as chair, Warsh has given little indication of whether he’ll push for a rate cut. His press conference after June’s announcement will likely give a stronger sense of his thinking on the rate path forward.
Barta doesn’t see a crisis imminent – but still remains unconvinced that the Fed will make the right choice with its next moves.
“If they do something crazy and decide to hike rates three or four times, that would wreck the market,” he said. “But they’ve done some things before that don’t make sense. So I don’t always anticipate that common sense will come through from the Fed.”
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