• Key insight: Federal Reserve Gov. Christopher Waller said Friday that he supports eliminating language in the Federal Open Market Committee’s forward guidance that implies that the central bank is inclined to cut rates, joining three dissents from regional Fed presidents during the last FOMC meeting.
• Expert quote: “You just can’t look at this data and say, ‘Oh yeah, we could cut rates here by September’ or something. You can’t be serious as a central banker and talk about that.” — Federal Reserve Gov. Christopher Waller
• Forward Look: Waller’s comments come as President Trump is poised to swear in Kevin Warsh as the next Fed chair Friday, the culmination of a monthslong effort to exert pressure on the central bank to lower interest rates dramatically.

Another Federal Reserve official has come out against the central bank’s so-called “easing bias” in the face of rising inflation.

Processing Content

In a Friday morning speech, Fed Gov. Christopher Waller said the Federal Open Market Committee should hold its policy rate steady until elevated energy prices — driven by the ongoing war in the Middle East — begin to fall. 

Until then, Waller said, the Fed should stand just as ready to raise rates as it is to lower them.

“Inflation is not headed in the right direction,” Waller said, pointing to higher energy and commodity costs since the U.S. and Israel first attacked Iran in late February. “Based on this recent data, I would support removing the ‘easing bias’ language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.”

Waller joins Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lori Logan in calling for the FOMC to adopt a neutral stance toward monetary policy. The three reserve bank leaders all voted against the policy statement issued by the committee following its meeting last month citing the inclusion of language suggesting further cuts. 

Waller was an early advocate for lowering interest rates. Last year, he made the case that the Fed should ease policy to support what he believed to be a shaky labor market. His push for cuts came at a time when many economists and policymakers were warning about the inflationary impact of President Donald Trump’s sweeping tariff rollout — concerns Waller suggested would be a one-time event. Speaking Friday morning at the Centre for Central Banking in Frankfurt, Germany, he said that appears to have been “the right call.”

Today, Waller said, the labor market and overall economy appear to be strong and would need to deteriorate significantly to necessitate an easing of monetary policy. As for inflation, he said, he is less confident about the transitory nature of the current run up in prices than he was during the tariff rollout. 

“I’ve been in favor of the easing bias for a long time, but the last couple of labor market reports and inflation reports just turned me the other way,” Waller said during a question and answer portion of Friday’s event. “You just can’t look at this data and say, ‘Oh yeah, we could cut rates here by September’ or something. … You can’t be serious as a central banker and talk about that.”

Specifically, Waller said he is concerned that a second jump in prices on the heels of the tariff shock could erode consumer confidence in prices returning to the Fed’s target growth rate of 2%. Recent surveys suggest this has not happened on a large scale yet, Waller said, there is some evidence that people are anticipating more inflation in the short- to medium-term. He said he will be watching to see if this sentiment shows up in futures markets. 

“While the stability so far of longer-term inflation expectations is encouraging, I can’t be sure it is the end of the story,” Waller said in his prepared remarks. “As we saw in the pandemic, a series of what seem to be transitory shocks can lead to persistent inflation and an unanchoring of inflation expectations.”

Later in the event, Waller downplayed the significance of the multiple dissenting votes during the last meeting. While unusual for the Fed — which he said has a strong “culture of consensus” — dissents are common within other central banking bodies around the world, Waller said, adding that the three reserve bank presidents who dissented last month supported the committee’s ultimate policy decision to keep the federal funds rate unchanged.

“Sometimes a vote is over a couple of different things and people kind of forget that,” Waller said. “There’s a bunch of stuff in that statement we all have to agree on and sometimes you say, ‘I just don’t like that one thing.'”

No way back on balance sheet

During the audience question portion of Friday’s event, Waller also addressed incoming Fed Chair Kevin Warsh’s long-stated desire to shrink the central bank’s balance sheet. Warsh is slated to be sworn in as Federal Reserve chair in a White House ceremony later Friday morning.

Waller said it is possible to reduce the Fed’s $6.7 trillion of assets, but not by much because of the nature of its outstanding liabilities. He estimates that the balance sheet could be reduced by $300 billion to $500 billion — a significant reduction, but not one that would turn back the clock to the pre-pandemic level of around $4 trillion, much less the pre-2008 levels of under $1 trillion.

“There’s no way you can go back to the small balance sheet that we had in 2008. We have $2.3 trillion or $2.4 trillion of just currency outstanding. That’s three times the size of what our balance sheet was in 2008,” Waller said. “Then you add the Treasury’s checking account on there, which is about $800 billion to $900 billion. Just those two things put you at over $3 trillion.”

Waller said he has not had a policy discussion with Warsh yet. Even so, Waller said Warsh’s goal of a “qualitative” reduction in the balance sheet is achievable, though he warned it should not be done in a way that significantly reduces the amount of reserves available to the banking system.

“I strongly believe we do not want to go back to a scarce reserves world,” Waller said. “But, if you could lower demand for reserves by the banks in terms of how much liquidity they would want to hold … you could decrease the supply and still have ample reserves. We’re looking into that. We’ll see what it is.”

It’s been a very bad month for mortgage rates, yet they remain below year-ago levels.

And by some margin too. Had this been last year, we’d be staring at a 7-handle 30-year fixed.

Instead, the 30-year fixed is hovering around 6.75%.

Sure, it’s still not great news, but it tells you that conditions are a lot better than they were in 2025.

The reason: mortgage spreads are no longer blown out like they were back then.

Tighter Spreads Keeping Mortgage Rates Below 7%…For Now

The 10-year bond yield ticked even higher today on continued fears of inflation tied to the Middle East conflict.

At last glance, it was up another four basis points to around 4.66%, the highest since last January.

Despite that, the 30-year fixed isn’t even close to its 52-week high.

That high, according to Mortgage News Daily, was 7.08% almost exactly a year ago to the day.

So we’re roughly 0.375% lower now versus back then, despite bond yields being higher.

The 10-year bond yield is a bellwether for 30-year fixed mortgage rates and the pair move in relative lockstep.

This means they always tend to move in the same direction. However, there is a spread between the two to compensate mortgage-backed securities (MBS) investors for the added risk.

That risk is mainly prepayment risk because most mortgages have either an explicit or implicit guarantee in the event of default.

The spread varies, but historically has been around 170 basis points higher for the 30-year fixed.

In other words, during normal times, a 4% 10-year bond yield would result in a 30-year fixed around 5.70%.

Today, the spread is pretty close to normal, around 210 basis points.

While that sounds high, consider the fact that it was about 250 bps a year ago. That’s why the 30-year fixed was averaging 7.10% with even lower bond yields.

If we had totally normal spreads right now, we’d be looking at a 30-year fixed around 6.375%.

So yes, it could be even better, but it could be worse. And this phenomenon is keeping us below 7%, for now at least.

Why Are Spreads So Much Better Now?

Mostly because prepayment risk has subsided. Ultimately, mortgage rates have kind of settled in at current levels between 6% and 7%.

They’ve been here for a while now and don’t appear to be going anyplace else, anytime soon.

As such, there’s more certainty for MBS investors looking for a certain yield on their investment.

They don’t have to worry as much about these mortgages getting paid off immediately thanks to some refinance boom driven by markedly lower mortgage rates.

From 2023 to 2025, there was a lot of disruption and uncertainty in the secondary market as QE ended, QT began, and mortgage rates nearly tripled.

That meant pricing had to be more defensive than it typically would be, hence the blown-out spreads.

At one point, these were as wide as 325 bps, which explains how we got an 8% 30-year fixed late in 2023.

That’s no longer the case and perhaps a lot of investors are looking at a premium of 200 bps as pretty solid for a home loan with an implied or explicit guarantee to be repaid.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.

Latest posts by Colin Robertson (see all)