Kevin Warsh is the nominee to replace Jerome Powell as Chairman of the Federal Reserve. Some people are concerned that this might delay or reduce the arrival of lower interest rates. But what’s the true story? In this Commercial Real Estate Mastery podcast , we’re going to review what the potential outcomes are from this announcement.
Episode 16: Is The Hope Of Lower Interest Rates All "Warshed" Up? Transcript
In the world of commercial real estate today, one item stands more important than any other to most property buyers and owners, and that is mortgage interest rates. Because interest rates determine so much regarding values of properties that you already own, as well as what you'd be paying for properties going forward. And interest rates right now are very lofty. Q1 of 2021 was perhaps the all-time low in American real estate interest rates. However, then, Jerome Powell, head of the Federal Reserve, started raising them, and he raised them with a gusto we've never seen before. He had 11 straight quarterly increases in the Fed funds rate, and it shocked everyone. No one ever believed that he would raise interest rates 11 straight times. So our rates went from the all-time low at a higher pace than we had ever seen in the past nearly 50 years. And as a result, we sit here today with interest rates on loans that hover between 6 and 7 percent, when not that long ago, just a few short years ago, those same interest rates were as low as three, nearly double. And Trump has promised to try and get these rates down.
And he's been a man of his word on many other items related to real estate. I mean, Trump, after all, is a real estate guy. So, clearly, for the sake of his own portfolio, he wants to get these interest rates down. So all eyes have been on his announcement of who would take over Jerome Powell's place at the Federal Reserve when he leaves in May. And he recently named his replacement. So Kevin Warsh was named as the next chairman of the Federal Reserve. Now, Trump can't just appoint him. It still has to be approved through Congress. So there will still be a vote to formally make Warsh the head of the Fed. But the odds are good because traditionally, they normally do vote in the president's selection for an appointee. But this has some people worried, because Warsh is not known to be someone who is very much what they call a dove, someone who wants to get interest rates reduced. He was, in fact, known more as a hawk in his past experience over at the Fed. So what's it mean? Does it mean interest rates are all Warsh-ed up? That basically his selection of Warsh kills off the idea of lower rates? Or is there more to the story?
Well, let's reflect back on what we know about Warsh. Warsh is someone who worked at the Fed before. In fact, he was one of the persons who voted on interest rates. And back then, he seemed like a hawk because he didn't like the idea of quantitative easing. And at the same time, we all know that quantitative easing is one of the tools that you have to use to lower rates. So, what does it all mean? Well, Warsh, back when he was a hawk in the Federal Reserve, when he hated lower rates, that was all the way back in 2006 because he served on the Fed only from 2006 to 2011. So we're trying to pass judgment on what he might be doing in 2026. That's 15 years since he left. And clearly, people change over time. Their opinions change over time, and the Federal Reserve has changed over time. So just because he voted against interest rates all the way back 15 years ago doesn't mean he necessarily still holds that opinion. And also remember that Warsh as head of the Federal Reserve, he gets one vote when they vote to raise or lower rates, but you have to have seven votes to get the job done.
So he is only one-seventh of the puzzle to get rates reduced. So why did Trump choose him? Why do you think he would have chosen this guy? Well, number one, because he thinks he can get him approved. Because as everyone's aware, there's a lot of people in Congress who hate Trump and would typically vote down his selection. If he had chosen someone who was not familiar with the Fed, someone who's well-known to favor lower rates, they probably would vote against it just to spite Trump. But Trump threw them a curveball because they can't say, "Well, this is a guy who just wants to lower rates no matter what Trump wants," because he didn't do it before, 15 years ago. So that gets people a little bit stumped. Also, he may just be a Trojan horse, because by introducing Warsh into the equation, it will be very hard for Congress to deny him the job. But maybe Trump knows more about Warsh than the rest of us do. It turns out that Warsh is a actual family friend of the Trumps. They've known Warsh and Warsh's family for a long time. So as a result, it's possible there's more of an inside track than we all know, or whatever agreements there are between Trump and Warsh.
It's also important to note that to really get interest rates down you have to use quantitative easing. Case in point, the Fed has dropped the Fed funds rate by three quarterly points, but it so far has had very little impact on the 10-year Treasury, which is what the mortgage interest rates are. So how do you get them down? If lowering the Fed funds rate has not succeeded, is there another mechanism? And that mechanism is called quantitative easing. That's when the government buys back its own debt, and as a result, the rates decline. Now, with the Federal Reserve, to do that, you have to have seven votes. No one can do it independently. No one can do it on their own. But that's only at the Federal Reserve. What many people do not know, but you can look up on your computer, is there's one other person that can get quantitative easing going, and he doesn't need any permission. He doesn't need any votes. He can just do it himself. And that is the head of the Treasury. Now, the head of the Treasury is Scott Bessent. And many people thought that Bessent would be Trump's selection to head up the Federal Reserve, he was favored to do that. But maybe Trump has also figured out this angle, because if he put Bessent in as the head of the Federal Reserve, he would still have to get six more votes to institute quantitative easing. But by leaving him in his original spot at the Treasury, he can do quantitative easing 100% on his own.
So by getting Warsh in the Federal Reserve as the head of that, and he starts putting the pressure on dropping interest rates on the short-term, which is what the Fed funds rate is, he could at the same time, could have Scott Bessent lowering the rates on the long-term, which is what most mortgages are tied to, using quantitative easing. So when people say, "Gee, I don't know. I don't know if rates are gonna go down or not now that they've selected Kevin Warsh," I'm not sure what they're talking about. I don't know if they've done any actual deep-dive research on what it truly means. It looks to me very possible what Trump has done is a very, very intelligent selection, if the goal is to get rates down. Because now he would have a loyalist, not only at the Federal Reserve, but also at the Treasury. And he could have them both work in unison to try and get rates dropped. He has said his big focus, starting in May when Jerome Powell leaves the building, is to get those rates down. That's one of his big missions he said, on the remainder of his term as president.
So maybe he has concocted the dream team potentially to get the job done. Also, don't forget that a lot of what makes rates go down is the economy. When the rates started to go to their lowest level in American history, it was triggered by the Great Recession. And even though the economy has seemingly held up so far, you have to remember that we typically have recessions in cycles that happen every eight years or so. And the last one we had was all the way back in 2008. 2016, we would have normally had a recession, but we didn't. 2024, no, we didn't then either. We are right now more than two times longer than any period in American history between recessions. So when we finally do have one, it should be fairly severe, and that could well be the trigger to really get rates down. So perhaps Trump knows more than we do also as far as what the economic predictions are. He sees a lot more data than we do as consumers. And it's very possible he sees that by the combination of Warsh, and Bessent, and a national recession, rates could really decline a lot.
The bottom line is don't read what the pundits say. Do your own independent research. Ponder what you really think Trump would be doing in choosing Warsh, and I think we'll all come to the realization, at least by May, that Warsh may be more of a dove than anyone expected. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Hope you enjoyed this. Talk to you again soon.