Housing News

What the Fed Leadership Shake-Up Could Mean for Mortgage Rates

The U.S. Federal Reserve ushered in a new chair this month, renewing hopes that lower mortgage interest rates are on the horizon.

President Donald Trump swore in Kevin Warsh to lead the nation’s central bank in May. Warsh replaced Jerome Powell, who will remain on the Fed’s Board of Governors.

While the Fed doesn’t set mortgage rates directly, its policies heavily influence the direction in which these rates move. So, a new Fed chair handpicked by President Trump, who is keen on lower interest rates, may have an impact on if mortgage rates move up or down.

But those expectations should be tempered as mortgage rates are still being driven by more prominent factors, such as inflation and the war in Iran.

“Warsh’s [Fed] will have real, but limited influence on mortgage rates because right now almost everything is downstream of one thing: the conflict in the Middle East,” said Jake Krimmel, senior economist at Realtor.com.

Here’s how the leadership changes at the Fed could influence mortgage rates.

The Fed doesn’t set mortgage rates, but it does influence them

The Federal Reserve sets the Federal Funds rate, which is the short-term interest rate banks charge when lending to each other on an overnight basis. That influences the interest you pay on credit cards and the yield you earn on deposit accounts, but it doesn’t directly set your mortgage rate.

By contrast, mortgage rates are primarily tied to the 10-year, U.S. Treasury bond market. When investors are worried about inflation or the economy, interest rates on bonds tend to rise. This typically causes mortgage rates to rise with them.

Even so, the Federal Reserve’s decisions can still influence home loan rates. When the Fed indicates it is likely to lower the Federal Funds rate, mortgage rates generally dip and vice versa.

If inflation is rising, the Fed typically raises rates to keep it in check. However, if unemployment picks up, the Fed will often lower rates to give the economy a boost.

How the war in Iran could keep mortgage rates higher for longer

While the change in leadership at the Fed has garnered a lot of well-deserved attention, the biggest force impacting mortgage rates right now may be the conflict in the Middle East.

“The Iran War is driving all of it, including higher prices today, fears of inflation contagion into core goods and services, a trade and supply shock, cratering consumer sentiment, and a nearly 30% spike in gas prices,” said Krimmel.

When oil and energy prices go up, the cost of goods and services tends to rise as well. That can fuel inflation, which, in turn, often pushes bond yields and mortgage rates higher.

“The war in Iran is having a tangible influence on mortgage rates,” said Gilbert Michaud, an environmental policy professor at Loyola University Chicago. “Energy prices are continuing to rise, which is keeping inflation high. … [That means] the Fed will be less willing to cut interest rates aggressively.”

Despite the leadership changes at the Fed, borrowers shouldn’t expect significantly lower mortgage rates until oil prices fall and inflation begins cooling across the economy.

Why a new Fed Chair doesn’t move rates

The idea that a Fed Chair can single-handedly lower interest rates is a myth.

Rate decisions are made by a 12-member committee. Warsh is one vote on the Fed. And he has inherited a board that still includes Powell, whose term as a governor runs through 2028.

What matters will be the collective decisions of the Fed governors, even if Warsh and Powell have different opinions.  

Even if Warsh wants to shake things up, he may still have reason to move cautiously rather than cut rates aggressively right out of the gate.

“He has the most to prove to the committee, to the markets, and to the American people,” said Krimmel.

What homebuyers and homeowners should know right now

While new leadership at the Fed may lower rates in the future, it doesn’t seem likely in the near term. Simply put, the new chair inherits conditions that neither he nor the Committee can quickly reverse, including the war in Iran, elevated inflation, and pressure on the bond market.

But you don’t have to wait for mortgage rates to fall.

You may still have options to secure a lower mortgage rate, such as purchasing mortgage points, choosing a shorter loan term, or opting for an adjustable-rate mortgage (ARM).

An ARM starts off with a lower introductory interest rate for the first five, seven, or 10 years of the loan, and then adjusts to current market rates every six months to a year. The specifics depend on the loan you use.

Remember, trying to perfectly time mortgage rates is challenging even for professionals who watch rates for a living. If you find the right home and you can comfortably afford the monthly payment and related housing costs, financing the purchase now may make sense.

Refinancing later is always an option if rates fall.