Trump’s pick for Fed Chairman Kevin Warsh has an unusual plan to lower mortgage rates

After long discussions, President Donald Trump he announced Kevin Warsh as proposed to lead the Federal Reserve.

Trump has made it clear that he wants a Fed chairman who will lower interest rates aggressively, and expressed his confidence in Warsh in a statement, saying he “will never let you down.”

In particular, the president wants lower mortgage rates, which he sees as the only way to solve the housing crisis without reducing home prices for current owners. Warsh also talked about the need for lower mortgage rates, but he has a unique idea of ​​how to deliver them.

Warsh served as Fed governor from 2006 to 2011, during the heart of the global financial crisis when he played a key role in shaping the central bank’s response to the downturn.

But since leaving the Fed, he has become a sharp critic of the Fed Chair Jerome Powell and a continuation of the Fed’s crisis-era policies, arguing for reform in what he calls “regime change.”

Although he never publicly disputed policy decisions during his time at the Fed, Warsh was known as a “hawk” in favor of high interest rates, a record that would seem to put him at odds with Trump’s release of easy money.

Recently, Warsh has advocated for lowering interest rates, saying current policies are slowing economic growth and causing a housing slump, where first-time homebuyers struggle to find homes.

The Fed does not regulate loan rates, but it sets the standard for short-term borrowing among commercial banks. Mortgage rates are determined in the free market, and are influenced by investors’ expectations about inflation and future Fed policy.

The Fed uses high interest rates to curb inflation, and low rates to boost the labor market, in keeping with the central bank’s dual mandate of price stability and high employment.

But Warsh said he believes current Fed policymakers misunderstand inflation, and have untapped power to lower short-term rates without igniting runaway inflation.

“They believe that inflation is driven by consumers, by rising wages, by consumers spending more,” Warsh told Barron’s in a recent interview. “I strongly disagree. Actually, I think inflation happens when the government spends too much money and prints too much.”

Warsh says that by turning off what he calls “the press,” or the Fed’s ability to expand the money supply by buying securities, he “created room to lower interest rates.”

The key to unlocking lower rates, argues Warsh, is significantly reducing the Fed’s large balance sheet, which is more than $6.6 trillion in Treasury notes and mortgage-backed securities.

“The Fed’s bloated balance sheet, designed to prop up big firms in the past, could be significantly reduced,” Warsh wrote in a Wall Street Journal op-ed. “That capital can be redistributed in the form of lower interest rates to support families and small and medium businesses.”

As part of the philosophy, Warsh suggested that he believes the Fed should sell two billion dollars of mortgage-backed securities (MBS). However, there are reasons to believe that the move will push mortgage rates higher, at least temporarily.

The Fed has continued to buy MBS during the COVID-19 crisis as a measure to stabilize financial conditions, and some economists believe the move helped lower mortgage rates to record declines of less than 3%.

Some banking groups and bond experts have actually called on the Fed to buy more MBS as a measure to lower mortgage rates. However, in his comments, Warsh seems to strongly oppose that idea, and instead favors selling the Fed’s remaining MBS assets.

Warsh also criticized the Fed’s use of forward guidance on interest rates—a speculative “dot plot” that emerged during the 2008 financial crisis.

“I think precommitting like they’re doing in this series of bullet points, each person saying how many times they cut … is not very productive,” Warsh told CNBC last year. “They are taking a big risk with inflation.”

In essence, Warsh contends the two main tools the Fed should use to deal with long-term debt are the balance sheet and forward guidance.

However, he seems to believe that a stripped-down Fed operating more like the pre-2008 central bank would be able to transmit lower interest rates throughout the economy by eliminating the financial roots of inflation.

It’s an unusual idea, and it’s unclear whether he’ll be able to convince the other 11 voting members of the Federal Open Market Committee, who have an equal say in policy. The panel voted on Wednesday to leave interest rates unchanged at 3.5% to 3.75%, indicating reluctance for further rate cuts.

“This is not a crisis situation where the chairman naturally amasses outside authority or the majority of voters converge on the chairman’s reading of the latest data,” said Realtor.com®’s chief economist. Jake Krimmel. “If anything, it’s a place where structural consensus is difficult and where the power of the new chair may be weaker, less powerful, than usual.”