Inflation figures are up – where does that leave the Fed’s new chief?
When Kevin Warsh took the Fed chair last month, the expectation in Washington and on Wall Street was that he would steer the central bank toward lower rates. Eight weeks later, the Commerce Department reported Thursday that the Fed's preferred inflation gauge hit 4.1% in the year to May - more than double the 2% target - and markets are now pricing nearly even odds of a rate hike in September.
For mortgage originators, that shift matters. The 30-year fixed rate has been sitting around 6.5%, a level that has changed the conversations loan officers are having with borrowers, and the path from here is less clear than it was at the start of the year.
What the data shows
The personal-consumption expenditures price index rose 0.4% in May, matching April's pace, the Commerce Department said Today. Excluding food and energy, core PCE was up 0.3% for the month and 3.4% over the past 12 months. Consumer spending rose 0.7%, slightly above expectations. Personal income rose 0.7%, above the 0.4% forecast.
None of it was a surprise. May's consumer price index had already come in at 4.2% annually - the hottest reading in over a year - and components of the producer price report had pointed toward a firm PCE number. The data confirmed the direction rather than changed it.
At Warsh's first FOMC meeting last week, the Fed held rates at 3.5% to 3.75%. But the dot plot told a different story: nine of the 18 officials who submitted projections said rates should finish 2026 above the current range, with six of those backing two quarter-point increases. Warsh did not submit his own forecast, breaking with the practice of his predecessors. The committee's projections put core PCE above target through the end of 2027.
Bank of America, responding to the meeting, revised its outlook to call for three hikes - in September, October and December - lifting the federal funds rate to 4.25%-4.50% by year-end, with no cuts expected before 2028. That scenario would push long-term bond yields higher and tighten affordability further in a housing market already running short on inventory.
The pressure from the White House
Trump put Warsh in the job partly because he had grown tired of Powell's resistance to rate cuts. Warsh had spoken publicly in favor of lower rates and argued that investment in artificial intelligence would eventually bring inflation down. That was the backdrop to his appointment.
It is not the backdrop he is working in now. Treasury Secretary Scott Bessent went on CNBC Wednesday to offer what amounted to a public endorsement of Warsh's hawkish turn. "He came out tough, talking about the inflation," Bessent said, adding that he was confident Warsh "will take the best path to satisfy both the inflation mandate and the growth mandate." When asked whether he had discussed with Trump why rate cuts are off the table, Bessent said the president "has said both in public and privately that he has every confidence in Kevin Warsh."
What Bessent did not say is that Trump has given up on cuts. Neil Dutta, head of economics at Renaissance Macro Research, drew the more pointed conclusion. "On the Fed, I heard a green-light to hike," he wrote after Bessent's Tuesday remarks at the Economic Club of New York.
A hike would test that confidence. Trump has been quieter on rates since Warsh took over than he was during the Powell years, but the White House has not changed its stated preference. The gap between what the inflation data requires and what the administration wants is widening.
Warsh's approach
At his press conference last week, Warsh was unambiguous on one point and careful about everything else. "The Fed will deliver price stability," he said. "The commitment to deliver is strong, unanimous, and unambiguous. And that's an important message we've missed for five years. And we're going to fix that."
He stripped forward guidance from the policy statement, a change Bessent applauded, and set up five task forces to review the Fed's operations. One, he said, would "examine the drivers of inflation, first principles, and weigh the full range of ideas for delivering price stability in a changing economy" - language that has prompted questions about whether a review of the 2% target itself is in the works, though Warsh has not confirmed that.
He said nothing about when or whether rates might move. He confirmed his weekly meetings with Bessent continue. On whether he had spoken with Trump, he offered only: "I don't have anything for you."
Brokers who have been tracking Warsh's early signals told MPA the removal of forward guidance has made pipeline planning harder. Without a clear signal from the Fed, the conversation with buyers has shifted from when rates might fall to whether a client can manage within the current range if they don't.
Where rates stand
The 30-year fixed averaged 6.60% last week, according to the Mortgage Bankers Association, flat on the prior week. The MBA is forecasting rates stay in the 6.1%-6.3% range through the rest of the year, on the assumption that inflation gradually cools. That assumption is getting harder to defend.
"It's clear that we're in a new era and it's going to take a while for markets to figure out how to react," said Chen Zhao, head of economics research at Redfin, after last week's meeting. "One thing is certain: the committee as a whole is taking inflation very seriously, which means mortgage rates are unlikely to retreat much in the near future."
Vishal Garg, CEO of mortgage platform Better, noted the indirect link between Fed decisions and what borrowers pay. "These mortgage rates track long-term Treasury yields, which move based on investor expectations for inflation, growth, and the Fed's next step," he said.
Bessent's view is that the energy spike driving much of the inflation is temporary. "Now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target," he said Tuesday. If the Iran ceasefire holds and oil prices fall, the case for hikes may soften before September.
If it doesn't, the Fed's next scheduled meeting on July 28-29 will face the same question this one did - and with Thursday's PCE print in the record, the argument for staying put is a little harder to make.
