Will ‘hawkish’ Warsh be able to drive rates down?
With just two Federal Reserve meetings left until the expiration of Jerome Powell’s term as chair, it was only a matter of time before President Donald Trump picked his replacement.
Although it took longer than expected, the decision was finally announced on Friday. Former Fed governor Kevin Warsh will return to the central bank to serve as the 17th chair.
Warsh is an interesting pick because he is known as someone tough on inflation. However, he will certainly be tasked by Trump with lowering the Fed funds rate, which the president believes Powell has been too slow to cut.
Even though that could be the plan for the new chair, one economist is quick to remind everyone that Warsh will still be just one of 12 votes on the Federal Open Market Committee (FOMC).
Odeta Kushi, deputy chief economist at First American, said that even with the move from Powell to Warsh, it doesn’t mean the central bank’s policy will change overnight.
“Leadership changes in 2026 are unlikely to materially alter the Fed’s policy direction,” Kushi told Mortgage Professional America. “Although the chair influences communication and risk framing, policy is ultimately set by a committee where the chair holds just one vote. Any new leadership may shift tone, but the dual mandate keeps policy grounded in employment and inflation goals, limiting the scope for sudden changes.”
Warsh must be approved first by the Senate Banking Committee, which has a 13-11 Republican majority. However, Republican Sen. Thom Tillis reiterated on Friday that he would not approve a nominee for Fed chair until the investigation into Powell is resolved. If the vote ends in a tie at 12, Warsh would not advance out of committee.
Waiting for confirmation hearings
Much of the mortgage industry will want to hear what Warsh has to say during the Senate confirmation hearings. Markets have had confidence in Warsh as a potential pick because they believe he will follow his own agenda rather than the one laid out by the White House.
He told CNBC in an interview last year that the central bank needed a “regime change.”
“The credibility deficit lies with the incumbents that are at the Fed, in my view,” Warsh told CNBC last July.
This could lead to some conflict among the 12-member FOMC. He will be tasked with lowering rates in the short term, but in the long term, many believe he will seek to bring inflation under control and reduce the Fed’s balance sheet.
More reactions have come in from across the mortgage industry. Bob Broeksmit, president and CEO of the Mortgage Bankers Association, offered his congratulations to Warsh earlier today.
“MBA congratulates Kevin Warsh on his nomination to serve as Chairman of the Federal Reserve,” Broeksmit said in a press release. “His prior service on the Federal Reserve Board, where he developed a reputation as a prudent, thoughtful voice on monetary policy, paired with his private sector experience, will be invaluable as he leads the Federal Reserve in what has become an increasingly challenging and complicated mission.”
Broeksmit also noted some of the things they’re hoping to hear from Warsh during his Senate confirmation hearings.
“We look forward to learning more about his views during his Senate Banking Committee hearing,” Broeksmit said. “A balanced regulatory approach and a safe, resilient bank capital framework are essential to a healthy banking system that supports economic growth, job creation, and access to credit for consumers and businesses.
“MBA will continue pressing for targeted regulatory improvements – including recalibrated capital treatment for mortgage servicing rights and warehouse lending under a revised Basel III capital framework – that encourage greater bank participation in single-family and commercial real estate markets.”
Mat Ishbia, president and CEO of United Wholesale Mortgage passed along his congratulations to Warsh as well.
UWM applauds the appointment of Kevin Warsh, as the new Chairman of the Federal Reserve," Ishbia said in a press release. "We wish Mr. Warsh the best of luck and have confidence that he, along with President Trump will do all they can to help ease the burden of high rates on American Consumers."
Will mortgage rates drop?
Markets expect that Warsh will be able to push through a rate cut in his first meeting as Fed chair, pending Senate approval, on June 17. CME FedWatch puts the chance of the next cut happening in June at 65.4%, with a 48.5% chance of a 25-basis-point cut and a 16.9% chance of a larger cut.
Eric Hagen is the managing director and mortgage and specialty finance analyst at BTIG. He spoke to Mortgage Professional America before the announcement. He believes the choice of a new Fed chair was the next big ripple effect in the market, and he hopes the move will help push Treasury yields and spreads lower.
“I think the Fed is the next big shoe to drop,” Hagen said. “We totally expect that Trump is going to get his guy at the Fed, and he's going to drive interest rates pretty much as low as possible. We’re looking for the Fed to cut rates and for that to have an almost immediate spillover effect, maybe lowering volatility even further, and potentially tightening the mortgage spreads further.
“But we really need to see Treasury rates fall. If mortgage rates get down to the low 5s, we feel like the market really starts to take off. There's going to be more activity at 5.5%, but like low 5s, high 4s, we think the market really starts to take off.”
Jonathan Hornik, a founding member and owner of the National Private Lenders Association (NPLA), told Mortgage Professional America in December that the new Fed chair would likely have to balance Trump’s desire for lower rates with the possibility of increased inflation.
“You're going to have a new Fed chair who is going to be aligned with the President's philosophy, lower rates, lower rates, lower rates,” Hornik said. “So that's going to happen. And then you're going to see how the economy, how the public responds to the stickiness of inflation, and how it remains higher.
“I got a lot of friends, people who I work with, and I know that they say they're choosing not to go out to eat now. They’re going to the grocery store, and they're choosing less expensive brands. Now, usually that's not something they do, but they're feeling it, so salaries aren't keeping up with prices, which is something we're going to have to get our hands around.”
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