Kevin Warsh, the new Federal Reserve chair, appeared before the House Financial Services Committee on Tuesday. Two exchanges stood out for anyone talking to buyers or sellers about rates right now.
Reps Pete Sessions (TX) and Joyce Beatty (OH) asked Warsh pointed questions on mortgage rates and housing affordability.
Here’s what he said and what it means for the rate conversations you’re having right now.
Warsh Points to Inflation as Cause for Higher Rates
Rep Sessions asked Warsh directly for his view on interest rates.
“I’ll prompt you now on the first one housing interest rates. You would please talk to us of your view of that. It’s higher than what I want but you’re the person that’s in the seat today.”
Warsh led by repeating points from his opening statement before reiterating what the Fed is prepared to do to indirectly improve housing costs for Americans.
“So, as I mentioned in my opening statement prepared remarks, the economy is solid. Financial markets look like they’re in very good condition. When we look at housing markets, the story is much more uneven. 30-year fixed rate mortgages, which is really the relevance of much of this discussion to a lot of hard-working Americans, it’s higher than it’s been. And in part, that’s because of inflation that has been above the Fed’s objectives.“
For context, the weekly average for the 30-year fixed mortgage rate sits at 6.49%, up from February’s three-year low of 5.98%. Warsh attributes that higher rate partly to inflation running above the Fed’s 2% target since March 2021.
June inflation came in at 3.5% annually, per the latest CPI report released by the Bureau of Labor Statistics (BLS) the same day as the hearing.
Sessions then asked what Warsh, as Fed Chair, was going to do about it:
“Okay. And looking forward… your goal? What can we look at you and say what is our new chairman going to do about that?
Here’s Warsh’s response:
“So, he’s going to deliver price stability with his colleagues at the FOMC. And what we can do in making sure that people are confident that the change in prices is at such a level they don’t have to think about it, and they don’t have to talk about it. That is consistent with long-term treasury yields being lower, and that’s also consistent with mortgages being more affordable.”
Warsh’s path to more affordable mortgages runs through price stability first, not a direct move on rates. He also tied that approach to the Fed staying out of politics, saying the Fed intends to “stay in our lane.”
The CME FedWatch tool is currently pricing in a roughly 50% chance the Fed’s benchmark rate ends up higher, not lower, by year end.
Fed Policy Impacts Housing, but Price Stability Comes First
Rep Joyce Beatty took the conversation in a more specific direction, noting that mortgage rates have more than doubled since pandemic-era lows. She named the groups feeling that the hardest.
- First-time buyers
- Minority borrowers, who are also facing high insurance costs
- Homeowners exiting pandemic-era forbearance who are struggling to land affordable repayment plans, putting some at risk of foreclosure
Here’s how Beatty phrased her question to Warsh:
“As you are aware, the Federal Reserve monetary policy heavily influences the United States housing market through setting of benchmark interest rates that directly dictate the mortgage rates and housing affordability. Many homeowners were able to access mortgages historic at historically low interest rates during the pandemic, but rates have more than doubled since then. And I’m concerned about the impact this is having on first-time home buyers and minority borrowers in particular, who are also facing high home rates and insurance policies.
“Homeowners are exiting pandemic-related forbearances and also are struggling to enter into affordable repayment plans due to the high interest rates, which in many cases could push them into foreclosures.
“Now, I understand that the Fed can’t increase housing supply or prevent foreclosures directly, but I’m interested to hear your thoughts on the impact of rate hikes on the housing market, especially for those more vulnerable home buyers.”
Warsh’s response started with a disclaimer about the Fed’s role, though he did acknowledge the impact of Fed policy on mortgage rates.
“We stay out of housing policy, and as the debate that’s been had in this room suggests, you all have a lot to say about what housing policy is going to be, but I don’t want to suggest that we don’t touch it. We don’t target housing. We don’t target any particular sector, but the decisions we make have a big effect on housing. And housing plays a huge role in most households’ family budgets and their savings. So we recognize the importance of it…”
From there, he commented briefly on the pandemic housing boom before circling back to the Fed’s focus on price stability:
“…I sounded quite optimistic about what was happening in manufacturing, what was happening in output. But you heard me say a somewhat more cautious note about housing. And I think that’s in part because monetary policy, when rates were cut to extremely low levels, provided what was thought of as a once-in-a-lifetime opportunity to get the first house. I would prefer a set of monetary policies that are not boom and bust, that don’t just make one generation more fortunate about being able to afford their first home than the next.
“So, what we can do in monetary policy is try to be clear about our objectives, deliver price stability in the context of full employment, and not react overtly to any data that happens one day or the next. We have an effect on long-term rates, and we take it very seriously.”
Warsh gave no signal of near-term rate relief, nor did he suggest the next FOMC meeting would bring a rate hike. In broad terms, any future mortgage rate movement is tied to inflation coming down first, within the context of stable employment.
This is from Day 1 of Warsh’s first Semiannual Monetary Policy Report before the U.S. Congress. The Senate hearing for Day 2 will go live this afternoon.
