Dave:
There is a dramatic showdown brewing at the Federal Reserve that could change the course for interest rates, for mortgage rates, and much of the entire economy over the next several years. And it is playing out right now. Back in March, President Trump nominated Kevin Warsch to be the next chairman of the Federal Reserve when Jerome Powell’s term is up on May 15th. But the nomination isn’t going as planned. And even if Warsh is confirmed, his job has gotten a whole lot harder in just the last couple of weeks. The President has adamantly called for lower rates, but inflation is going up. So what’s the path for the Fed? Will we see a new Fed chair in the coming weeks? Could the showdown between Powell and Trump really come to a head? How will monetary policy impact the housing market through the end of the year?
How these events unfold at the Fed in the coming weeks will impact almost every part of the investing world, so you better understand this and be prepared for what happens from here. Listen more on today’s episode of On the Market.
Hey everyone. Welcome to On The Market. I’m Dave Meyer, chief investment officer at BiggerPockets. Thanks for being here. The war in Iran is rightfully getting a lot of attention in the media right now. And if you want my take on how it’ll impact housing, check out an episode from last week that I put out that will go deep into that. But for today, there’s another major economic story, or maybe even you could call it the soap opera really unfolding right now that is hugely important to the economy, and that’s what’s happening at the Federal Reserve. As you may know, the Fed, the Federal Reserve, is the central bank for the US and has massive control over monetary policy, over bank regulations, and more in our economy. And right now, this very powerful institution in the US is going through not just a leadership change, but also somewhat of an existential crisis.
In the coming weeks, we’ll probably, we don’t really know, but probably know who will lead the Federal Reserve in its next iteration. We’ll know what types of policies the new chairperson will pursue. And perhaps even more importantly, we’ll learn a lot more about the concept of Fed independence, which is another way of saying what power the President and Congress and politicians have over the Fed. Or maybe we should say the power of the Fed has over those politicians. We don’t really know which one it is. So today on the show, we’re going to dive into the ongoing and often escalating drama at the Fed and help you understand what’s happening, why it matters, and what to prepare yourself and your portfolio for. Let’s do it. First up, let’s get to the basics. The Federal Reserve is about to go through a scheduled leadership change. Basically, Jerome Powell, who is the current chairman of the Federal Reserve, his term is up on May 15th.
Now, we’ve talked about this on the show before. If you follow the business or financial media, you know this, but Jerome Powell and President Trump have had a pretty public feud over the last couple of years. The feud is complicated. We won’t get into all of it, but I think that the main points here are that President Trump wants the federal funds rate to be lower than it currently is. Now, if you’ve been paying attention, you know that the interest rates, the federal funds rate has gone down over the last couple of years, but President Trump believes that it should go down faster. The voting members, the 12 members of the FOMC who make these decisions about interest rate policy disagree and haven’t lowered them as much as President Trump thinks that they should do. And the fact that this is a public feud is important.
We’re going to talk about this a lot today because it brings into question the concept of “Fed independence.” I’m going to talk about that a lot on this show, but Fed independence is basically just the idea that the Federal Reserve should have limited influence from politicians on what economic and monetary policy should be. The logic goes that the Fed should be making long-term decisions about what’s best for the country and for the economy. And because those decisions might not align with the election timeline in the United States, they shouldn’t be getting pressure from the president or Congress people on what monetary policy should be. We’re going to talk about that a lot, but that’s kind of the idea of Fed independence. Now, one thing I want to remind people as we go into this and talk about this feud and unfolding soap opera here is that Trump actually was the person who nominated Jerome Powell.
He chose Jerome Powell as the chairman of the Federal Reserve back in 2017, but for the reasons I just mentioned, that relationship has soured. Trump has actually gone so far as to threaten to fire Powell. There are a lot of legal questions about whether or not President Trump has the legal authority to fire Powell. During this time, Powell has refused to resign. So over the last couple of years, these two very powerful people have been feuding in public. But where we stand today, ultimately, Trump did not try to fire Powell, and instead he named a successor back in January, Kevin Warsch. The idea was Powell’s term is up in March 15th, so no need to get into a legal debate about whether he could fire Powell when Trump has the very clear legal authority to replace Powell as of March 15th. And Trump has nominated Kevin Warsch to be that person to take over as the chairperson of the Federal Reserve.
Now, Worsh by most analyses is a qualified candidate. He has a long career in finance. He was the youngest Fed governor back in 2006. He was a Fed governor for five years during the financial crisis, so he has exposure to that. Ultimately, he resigned in 2011 because he was opposed to quantitative easing. Something we’ll talk about that in a little bit. But from what I’ve read, he seems to be a well-respected candidate. In the past, he has said that he does support lower interest rates. This was months ago, back before the war started. So he said that he did support lower interest rates because he believes that AI productivity gains will offset those lower interest rates and help keep prices under control. So his belief is that AI will allow us to lower interest rates without a fear of inflation because of those productivity gains.
That does pass the muster economically speaking. Just so you all know, we don’t know if those productivity gains will come, but if there are productivity gains because of AI, inflation could stay in check. Now, these beliefs are probably a major reason Trump picked him to be the nominee because they have somewhat aligned feelings on monetary policy. So this should be an easy nomination, right? Trump is picking his guy. The guy is pretty qualified. The Senate who has to nominate and confirm the Fed chair is controlled by Republicans. Worshe appeared before the Senate today as is normal for this type of nomination. So it’s all going well, right? Trump’s going to get a lower federal funds rate in the coming months. Well, there are a few problems here. Specifically, there are at least three major ones. The first is a nomination fight, which we’re going to get into.
The second is the structure of the FOMC. FOMC, by the way, just means Federal Open Markets Committee. These are the people who vote on interest rate policy. And then the third is recent data that we’ve gotten on inflation. And when you take these three things together, it could make for some major drama unfolding at the Federal Reserve over the next couple of months. We’re going to dive into each of these three things individually, what they mean for the Federal Reserve and for your portfolio, but we got to take one quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer. Today, we are talking about the drama unfolding at the Federal Reserve. Kevin Warsch has been nominated by President Trump to replace Jerome Powell as the chairperson of the Federal Reserve. And although it was feeling not that long ago like this would be an easy nomination process, there are actually some major challenges that are calling everything into question. The major challenges are the nomination fight, the FOMC structure, and higher inflation. Let’s dig into each one. First up is the nomination fight. So basically what needs to happen is there is a Senate banking committee that has 13 members on it. Six of them are Democrats. Seven of them are Republicans. And you need to get the majority of those people on that committee to vote for Kevin Warsch to support his nomination for this vote to go to the full Senate for confirmation.
But it is being held up by Republican Senator Tom Tillis, who said he will not support Warsch’s nomination until the DOJ investigation into Jerome Powell is dropped. Now, if you haven’t heard of this, back in January of 2026, the Department of Justice subpoenaed the Fed over cost overruns on building renovations that they were doing to their facilities, projects that reportedly their cost ballooned past $3 billion. And the US Attorney General for the DC area, Janine Piro, has said that she’s going to move forward with a criminal probe of Jerome Powell over his handling of the renovations and his related congressional testimony. Now, most observers, I will just say people have their own opinions about this, but most observers of this investigation, including Tom Tillis himself, the Republican Senator who could hold up the entire Fed nomination process, believe that the investigation was essentially manufactured to create legal cause to remove Powell.
Remember the feud where Trump was trying to find reasons to fire Jerome Powell? Well, Tom Tillis believes that the Attorney General in this case, Janine Piro, decided that she would prosecute Jerome Powell to further that goal, to remove Powell basically because Fed governors can only be fired. By most legal experts say they can only be fired for misconduct, not because of policy disagreement. So Tillis is saying this whole investigation was manufactured, right? He has said that he thinks the Department of Justice Probe was “launched solely to curry favor with the White House.” He’s basically saying he doesn’t believe that President Trump was behind this, but that the prosecutor in this case, Janine Piro, was trying to win favor with the White House and created or manufactured this investigation. And Tom Tillis says he refuses to reward that behavior by advancing a nomination that benefited from it.
Now, this is just Tillis’s opinion, of course, but so far the courts have agreed they have shot down the subpoenas issued by Janine Piro and another of other Republican lawmakers have said they don’t believe Powell broke any laws and that the case should be dropped. But the prosecutor, Janine Piro, with Trump support, has vowed to appeal and press on with the investigation. Now, I should mention that this is really just about the DOJ because Tom Tillis has said that he actually likes Warsh. He said that he’d vote yes the moment the investigation is dropped or concluded, but until then he won’t move. And if you’re wondering why Tom Tillis is so adamant about this and why he cares so much about this investigation, it’s because that concept of Fed independence that we were talking about before. This idea that the Fed should not set monetary policy due to politics, they should only set monetary policy based on their dual mandate to lower inflation and to keep unemployment low.
That is what Tom Tillis has said that he is trying to protect. And there’s a logic behind this, right? Because Fed independents may sound good or bad, but there are real consequences to Fed independence because the way I see it, and the majority of economists and investors and most people think that Fed independence helps us keep borrowing costs low, both for you and I and the form of mortgages and for the government itself. The Fed operating independently and not being seen as a political animal is what gives investors in our country and internationally confidence in monetary policy in the United States. If anyone is going to lend money to the US government in the form of bonds, you better want a Federal Reserve that is going to keep inflation in check, otherwise you could lose your money. And so if people are worried that Kevin Warsch or whoever, it doesn’t even matter, if you are worried that the Federal Reserve is going to lower interest rates because it’s a political priority and risk higher inflation in the long run, that means that investors who lend money to the US government are going to demand higher interest rates to compensate for that risk, right?
That means we are going to see bond yields go up. And if you watch this show, you know that when bond yields go up, mortgage rates go up. So in my opinion, maintaining confidence that the Fed is independent is extremely important, right? Because if Fed independence goes away, or even the perception that it goes away, there could be risk to borrowing costs and to the US dollar. And Tom Tillis is trying to protect that. His fight is not with Warsch, right? His fight was with the Department of Justice and that what they’re doing could impact confidence in Fed independence. And he’s using the lever he has, which is not voting for Kevin Warsch to try and protect that independence. Now, I personally think Fed independence is really important, but I just want to say, I get it. The Fed isn’t perfect. I know there are a lot of people who are going to say, “The Fed was never independent,” or, “Get rid of the Federal Reserve.” Don’t agree with those ideas of getting rid of the Federal Reserve.
I will just say that, but at the same time, I do acknowledge the Fed is not perfect. I think criticism of their performance in recent years is entirely warranted. I get that the current structure of the Fed is weird and that they’re beholden to Congress, but there is this lack of accountability and all of that. I get all of that. It is not perfect, but still, I do not believe that the alternative is better. I do not believe that the President or Congress people dictating interest rates is good for the economy or the country, or for really anyone except the people who are campaigning. I just believe there needs to be separation for the system to work well, even if that separation is admittedly imperfect. So anyway, that’s what’s going on. And right now it’s super unclear of how the nomination is going to move forward.
There could be a standoff here, and I think it’s pretty likely that a standoff happens. Tom Tillis has been very adamant today in Congress, on TV, he was saying he will not support Kevin Warsch until these lawsuits are dropped. He said again, “I like Warsch. I will vote for Warsch when these lawsuits are dropped, but as of now, there has been no sign that these lawsuits are going to get dropped.” So what happens here? Well, there are a couple paths. Let’s talk about them. Number one is Department of Justice backs down. If the investigation is quietly dropped or concluded with no charges, Tillis votes yes, Warsh likely gets confirmed relatively quickly. We don’t know when that can happen, but I would guess if the lawsuits get dropped, he gets confirmed pretty quickly. Second option is Tillis just keeps holding firm and so does the DOJ, right?
Tillis is not seeking reelection. And he’s actually said he will block this nomination through January 2027 if he has to. And Senate Majority Leader, John Thune, has acknowledged that Warsch can’t really get confirmed without Tom Tillis. So he really is the linchpin of this situation. And if that happens, even though Jerome Powell’s chair term expires May 15th, he actually has a board seat on the Federal Reserve. This is just kind of weird how this works, but he’s still technically on the Federal Reserve FOMC through 2028. And Powell has said he’ll remain until a successor is confirmed. Now, Trump has now threatened to fire him if he stays past May 15th, but that has its own legal questions and risks. The Supreme Court is currently hearing a related case about whether Trump can fire Fed governors at all. So this could just play out in a big, messy limbo.
And I’ll be honest, I think that is the most likely near term outcome. It does not seem like Senator Tom Tillis is going to fold anytime soon. It does not seem that the Department of Justice is going to drop their investigation into Powell. And even though Powell will technically lose the chair title in May and reduce his influence over the voting members of the FOMC, he might still be there. So we might actually have Powell longer than expected. And I think it’s kind of ironic that the Department of Justice is being accused of trying to drum up reasons to fire Powell, but by doing so, they could get Powell longer than they were expecting for, because if they just dropped the investigation, they could probably get Warsch confirmed in the next three weeks. It could be over that quickly, but it does not seem that’s what’s going to happen.
Drama, drama, more drama in Washington. But let’s just assume for a minute that Warsch does get nominated because I personally think eventually he will get nominated one way or another. So what happens once Warsch gets nominated? Do we get much lower rates? We’ll get to that right after this break.
Welcome back to On The Market. I’m Dave Meyer talking about the drama unfolding at the Federal Reserve. We’ve talked about the nomination fight, which was just one of three things challenging lower interest rates in the United States. The second are the makeup of the FOMC and higher inflation. Let’s dig into those two things. For now, we’re just going to assume that Warsch does eventually get nominated. I personally think that will happen. I’m just guessing. I don’t have any insider information into what’s going on in Washington, but I think eventually they will figure out a way where Kevin Warsch becomes the chairperson of the Federal Reserve. He has said that he thinks federal fund rates should go lower. He said that back in January, February. He was chosen by President Trump who has every right to pick to nominate the chairperson. And it does seem that they are aligned and they’re thinking about monetary policy.
So does that mean we’ll get lower federal funds rate? If he is eventually confirmed, no, it doesn’t because people really, I think, overvalue what the chairperson at the Federal Reserve does. They are important. They are absolutely important for setting policy, for setting the tone, for setting priorities at the Federal Reserve. But at the end of the day, the FOMC, the way that interest rate decisions are made in this country is a vote, a vote of 12 different people. And perhaps Kevin Warsch can create consensus among those 12 people, but that’s uncertain, right? We don’t know if that’s going to happen. Warsch has said he supports lower federal funds rate, but he will have to convince a majority of FOMC voters that that is true. And so far, they haven’t felt that way. In the last couple of meetings, they have majority of people have voted to keep interest rates where they are.
And so he would have to convince people that the federal funds rate needs to go lower than the current path they have been on. The current strategy for monetary policy would have to change and he would have to lead that. And I think that job of convincing those people, you might have been able to do it in January or February, but the reason why I think it’s getting hard brings us to our third challenge, which is inflation. I believe that Kevin Warsch’s job, if he gets nominated, has gotten much, much harder in just the last couple of weeks because inflation is up and that can really tie the hands of the Federal Reserve. Because what do you do right now? The Fed has a dual mandate. Their job is to control inflation and to maximize employment. So what do you do? Do you cut rates to support jobs?
You could, but that could reignite or accelerate inflation. Might be needed, but there are risks with that. Do you keep rates high to fight inflation, but risk the job market, right? It’s kind of a lose-lose situation right now because we don’t have a clear line of sight. This has been going on for years where we don’t know what’s the bigger risk. Is the bigger risk inflation or the labor market? That’s the question the Federal Reserve is always asking itself and that they’re making monetary policy to try and balance that question. Now they get it wrong sometimes. Clearly in 2022, they did get it wrong, but that is the question they are always trying to answer. And when you get in the environment like we’re in right now where there is risk of stagflation, because there is, I’m not saying we’re in stagflation right now, just want to be clear, but their risk of stagflation that we have rising unemployment at a time where inflation is going up, that risk is going up and that is a lose-lose situation, right?
That is a bad situation for the Fed. They have no easy policy decisions. So for Kevin Warsch, even if he believes that we should be lowering rates, convincing the other 11 members of the FOMC to lower rates during a period where inflation is going up, that’s a tall task. That’s going to be pretty difficult. Even if President Trump wants lower federal funds rate, that’s just not the way the Fed works. Even if he gets his chosen nominee to be the chairperson, that’s not the way the Fed works. You have to build consensus, right? That is how the Federal Reserve works and building that consensus for lower federal funds rate during a period where we have rising inflation is going to be very hard. So does a Fed chairman, you’re going to hear a lot about this over the next couple of weeks. Does a new Fed chair mean lower federal funds rate and lower mortgage rates?
No. We don’t even know if he’s going to be confirmed. I bet he will, but when? We don’t even know. And even if he is, again, worship just one of 12 members and we don’t know what everyone else will vote for. He himself might have changed his mind in the last couple months with higher inflation. A lot of the policy he said that he was going to support was before the war started and before inflation really started taking off again. So we just don’t know. So what does this mean for mortgage rates? First, it means that even if the Fed cuts the federal funds rate, which I don’t think is likely in the next couple months, but even if they do, there are two things fighting mortgage rates, bond yields. Even if the Fed lowers the rate, they’re probably not going to go down that much if inflation remains high.
Maybe a little bit, but I wouldn’t count on much. The second is Worship said that he wants to shrink the balance sheet of the Fed. Not going to get too far into this is a little bit wonky, but he’s saying that he could sell some of the mortgage-backed securities that the Federal Reserve owns. And if they do that, that could actually make mortgage rates go up, right? Even if he does this in conjunction with federal funds rate cuts, it could make mortgage rates go up because if they start selling, that makes more supply of mortgage-backed securities that could create oversupply, which pushes down the price of mortgage-backed securities and because yields and prices are inverted, when prices go down, yields go up. It’s complicated. I know. I don’t want to get too far into it, but just trust me that if they start selling mortgage-backed securities, that could put upward pressure on mortgage rates.
So we have two things, fighting mortgage rates going down here at the Federal Reserve. It is unlikely that they’re going to cut the federal funds rate, and there is potential that Kevin Warsch wants to unwind the Fed’s balance sheet, both reasons that mortgage rates are likely to stay elevated. The whole Fed, basically they’re just in a jam right now. And until we know if inflation’s going to go back down or if the labor market starts picking up again, they’re going to remain in that jam. I was actually the other day getting interviewed by a mainstream media outlet asking about this and asking for commentary on Warsh, and they asked pretty simply, “What can Warsh do to lower rates?” And I said, “Bring down inflation.” That’s my honest answer, right? It’s not lowering the federal funds rate. And I know it’s not fun or the quick answer, but that’s the honest thing that gets rates down.
Everything else could be neutral or could even be negative, but if they can get inflation down, bond yields will probably come down and that will bring mortgage rates down with them. Remember, the Fed does not control rates. The bond market really controls it and the bond market is super sensitive to inflation. And so if you get inflation under control, to me, that’s the most important thing to getting sustainably lower mortgage rates. Now, could they dip for a couple of days or weeks? Sure, of course. But what I would hope for is sustainably better borrowing costs, and that comes from lower inflation. So remember that, like I’ve said before, regardless of what people are going to say on the internet over the next couple of weeks about new Fed share and mortgage rates are going down, probably not. Sorry to say it, but it’s just very unlikely that they move down.
I was actually getting interviewed by another thing. They were asking for my mortgage rate prediction for May. I said they would stay between 6.2 and 6.6%. I don’t think they’re going down towards recent lows where we’re touching 6% for that glorious minute back in February. I just don’t see that happening. So that’s something to remember as this whole drama unfolds. But to be honest, for me, the more important thing is about this whole Fed independence thing. I really do believe it’s important that the Fed has strong independence, as that has much bigger and more long-term implications for the country, frankly, in my opinion, than who leads the Federal Reserve for the next couple of years, or whether or not interest rates go up or down in the next couple of months. Maintaining Fed independence, whether you like the Fed or not, if you unwind that, there are going to be negative consequences.
If investors and markets believe that the Fed has become a political tool, our borrowing costs in this country are going to go up, that goes everything from the government borrowing on our massive $39 trillion debt, to you and me taking out mortgages. So in my opinion, whatever has to happen to make sure that the Fed independence and the perception of Fed independence remains strong is paramount and honestly more important than any policy decisions they make in the short run. That’s just me though. I would love to know what you think. Let me know in the comments below. That’s our show for today. Hopefully, this all helps you understand what’s going on and why it could matter. This concept of Fed independence is on trial in many ways and will play out in the coming months. The leader of the Fed will have big sway and can change in the coming weeks.
And although neither is likely to positively impact mortgage rates in the short run, these things will really matter for long-term economic conditions, including those in the housing market. We’ll, of course, keep you all posted as this unfolds. I’m Dave Meyer. Thanks for watching. We’ll see you next time.