Kevin Warsh Era of Fed ‘Regime Change’ Begins With First Rate Vote

Federal Reserve policymakers began their two-day meeting to set interest rate policy on Tuesday, marking the first vote overseen by Kevin Warsh.

Warsh, who called for “regime change” at the central bank, has already issued his first major shift by reverting his title to “Fed Chairman,” rather than the “Fed Chair” title preferred by his predecessors Jerome Powell and Janet Yellen.

Other changes may involve shifts to the frequency and style of the Fed’s public communications, after Warsh indicated he believes the central bank puts too much emphasis on public forecasts and projections.

One thing that won’t be changing, at this meeting at least, is the Fed’s benchmark interest rate, after hot inflation readings took any prospect of a rate cut off the table for the majority of the 12-member Federal Open Market Committee that sets interest rates.

“For now, a ‘wait and see’ approach remains the only position a majority of the committee is likely to support,” says Realtor.com® senior economist Jake Krimmel. “The case for a pause is straightforward.”

Inflation, as measured by the consumer price index, surged to a three-year high of 4.2% last month, while job gains continued to surprise on the upside. The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the job market. It makes a rate cut at this point a nonstarter, despite President Donald Trump’s calls for lower borrowing costs.

Still, Warsh’s first meeting as Fed chairman will be closely watched by investors, lenders, and borrowers for any clues about his new approach to the role.

“Markets will watch this first press conference closely to decode how Warsh plans to steer the central bank. It will be a departure from the Powell era, with Warsh likely favoring fewer speeches and minimal forward guidance,” says Stephen Kates, a financial analyst at Bankrate. “The era of predictable guidance may be sunsetting, transitioning back toward a less transparent Federal Reserve.”

Among other changes, Warsh has indicated he would prefer to eliminate the famous “dot plot” of rate policy projections issued by the FOMC each quarter that shows the anonymous forecasts of where policymakers believe interest rates will go over the coming months and years.

Instituted as a crisis measure during the near-zero rate era that followed the Great Recession, the projections are often wrong and have outlived their usefulness, Warsh has argued.

Markets will also be watching for Warsh to establish his credibility as an inflation fighter who is committed to keeping prices in check, a task that might put him at odds with Trump’s demand for lower interest rates.

“If Warsh can calmly project confidence, it will go a long way toward easing investor and economic concerns about this leadership handoff,” says Kates.

What a rate pause means for the housing market

Since December, the Fed has held its benchmark overnight rate steady in the range of 3.5% to 3.75%, where it is expected to remain after Wednesday’s vote.

Resurgent inflation has all but erased hopes for a rate cut this year, with financial markets pricing in a nearly 60% probability of at least one rate hike by December, according to CME FedWatch.

Meanwhile, mortgage rates have climbed sharply higher since February, as the Iran war drove global oil prices up, raising inflation fears for lenders.

Mortgage rates for 30-year fixed loans averaged 6.52% last week, according to Freddie Mac. That’s well up from the three-year low of 5.98% briefly reached in late February, just before the war began.

Higher mortgage rates have put a damper on home sales, with many homeowners who have lower rates locked in reluctant to move and give up their beneficial financing terms.

“Higher interest rates remain a major factor in low inventory across the U.S.,” says Richard Ferrari, Douglas Elliman’s president and CEO of brokerage for New York City. “We are not expecting a drop in rates and there actually may be a small increase. We are hoping for rates to remain where they are.”

Still, buyer demand has remained resilient in the face of higher mortgage rates, with existing-home sales posting an unexpected increase of 3.2% year over year in May.

“Demand for residential real estate in NYC and across the U.S. remains high,” says Ferrari. “When a buyer wants to buy, no matter where interest rates are they will buy! Their price point may be lowered but their ability and desire to purchase remains their top priority.”

The economist Krimmel says that the immediate stakes of Wednesday’s FOMC rate decision are limited by the fact that mortgage rates respond far more to long-term yields and inflation expectations than to the overnight policy rate.

“What matters more is the confidence consumers and investors can place in a Warsh-led FOMC,” he says. “Rather than a Fed committed to cutting rates, the bond markets and mortgage rates would both benefit from an FOMC that will hold rates when the data demand it, despite political pressure to cut, in order to anchor inflation expectations and pull long-term rates down over time.”

In other words, Warsh’s most crucial task Wednesday may be to convince markets that he takes the inflation threat seriously, and will refuse to lower rates unless the economic data justify it, whatever pressure he faces from the White House.

“The challenge facing Chair Warsh is not delivering lower rates; it is earning the credibility that would eventually make lower rates possible,” says Krimmel.