Fed Chair Kevin Warsh Blames High Mortgage Rates on Hot Inflation

Federal Reserve Chairman Kevin Warsh acknowledged elevated mortgage rates are holding back the housing market, as he delivered his first congressional testimony since taking office in May.

“The economy is solid. Financial markets look like they’re in very good condition. But when we look at housing markets, the story is much more uneven,” Warsh said in a hearing of the House Financial Services Committee on Tuesday.

“Thirty-year fixed-rate mortgages, which is really the relevance of much of this discussion to a lot of hardworking Americans, it’s higher than it’s been, and in part that’s because of inflation that has been above the Fed’s objectives,” said Warsh.

Inflation, as measured by the consumer price index, has remained above the Fed’s 2% target since March 2021. Overall inflation measured 3.5% annually in June, according to Labor Department data released earlier on Tuesday.

Meanwhile, mortgage rates are at 6.49%, according to Freddie Mac. That’s up sharply from the three-year low of 5.98% briefly reached in February, before the U.S. war with Iran sent oil prices soaring.

Mortgage rates are especially sensitive to inflation, because lenders demand a high enough interest rate to both offset the risk of the loan and compensate for the falling purchasing power of the dollar over the lengthy term.

Although the Fed doesn’t set mortgage rates directly, the central bank is tasked with keeping inflation in check, a mission that has significant impact on mortgage rates.

In his testimony on Tuesday, Warsh reiterated his commitment to reining in inflation, declaring that his tenure marked “a new chapter” at the Fed.

“Inflation’s a choice. The members of our committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to ensure price stability,” he said.

The Fed uses higher interest rates to fight inflation and lower rates to stimulated the job market, in line with the central bank’s dual mandate of achieving price stability and maximum employment.

Financial markets currently estimate a roughly 50% chance that the Fed’s benchmark interest rate will be higher by the end of the year, according to the CME FedWatch tool.

Such a move would dash the hopes of President Donald Trump, who nominated Warsh with the hopes that he would slash the Fed’s benchmark rate, as the president has long called for.

But in Warsh’s testimony, he reiterated that the path to lower inflation—and thus ultimately lower mortgage rates—runs straight through the Fed’s commitment and credibility as an inflation fighter.

“We’re going to stay in our lane at the Federal Reserve. The more we stay in our lane, the more we stay out of politics,” said Warsh. “The independence of the Federal Reserve is sacrosanct.”

Warsh’s testimony came as part of two days of regularly scheduled congressional hearings on monetary policy, which bring the Fed chair to Capitol Hill twice every year.

Keith Griffith is a senior news editor at Realtor.com covering housing policy, real estate news, and trends in the residential market. Previously, his work has appeared in Business Insider, The Street, Chicago Sun-Times, New York Post, and Daily Mail, among other publications. He has a master’s degree in economic and business journalism from Columbia University.