U.S. President Donald Trump has repeatedly stressed lowering mortgage loan rates, but there is growing analysis that the monetary policy stance of Kevin Warsh, whom Trump nominated as chair of the Federal Reserve (Fed), could instead increase upward pressure on rates. There are concerns that the White House's direction, which puts easing the burden of dwellings prices at the core of its economic pledges, could clash head-on with the policy philosophy of the Central Bank chief.
According to the Washington Post on the 10th, local time, President Trump has continued to emphasize that lowering mortgage loan rates is the most direct way to reduce burdens on ordinary people. Mortgage loan rates, which at one point exceeded 7% early last year, sharply dampened demand to purchase dwellings and made it harder for first-time buyers to enter the market. Trump said, "We can lower rates, and that is one of the things we want," making clear his intention to cut, but he did not specify concrete policy tools to achieve it.
By contrast, Warsh, the Fed chair nominee, has long criticized the Federal Reserve's $6.6 trillion (about 9,583 trillion won) asset holdings for distorting financial markets. The Fed implemented massive quantitative easing (a currency policy that supplies liquidity to the market) through the 2008 financial crisis and the 2020 pandemic, and as a result its asset size swelled from about $900 billion (about 1,307 trillion won) in 2008 to $9 trillion (about 13,068 trillion won) in 2022. It has since shrunk somewhat but still stands at $6.6 trillion (about 9,583 trillion won). Of that, about $4.3 trillion is U.S. Government Bonds (about 6,244 trillion won) and about $2 trillion is mortgage-backed securities (MBS; about 2,904 trillion won).
Warsh believes the Fed's large-scale asset purchases suppressed long-term rates below market-determined levels and, in the process, produced side effects by lifting asset prices such as stocks and real estate. In speeches and op-eds, he has said, "Whenever the Fed acts, its scope expands and encroaches on other areas of the macroeconomy," expressing concern about the accumulation of liability, capital distortions, and heightened inflation risks. His position is that it is not desirable for crisis-response tools to become a standing policy instrument.
The issue is the impact of shrinking the Fed's asset size on long-term rates. When the Fed buys bonds in large quantities, bond prices rise and yields fall. This leads to lower long-term rates, which in turn pushes down mortgage loan rates. Conversely, if it sells holdings or does not reinvest maturing bonds, the market must absorb more supply. In that case, investors demand higher yields, which can translate into higher long-term rates. Ultimately, there is a possibility of upward pressure on mortgage loan rates.
Bill English, a Yale professor and former director of the Fed's Division of Monetary Affairs, noted, "It is not easy to achieve both a smaller Fed balance sheet and low mortgage loan rates at the same time." Even if the president wants lower short-term rates, long-term rates are determined by market expectations and bond supply and demand, which can clash with the Fed's asset-reduction stance, he said.
Some economists, however, think the potential for conflict may be overstated. Jason Furman, a Harvard professor, assessed that shrinking the Fed's asset size is likely to proceed very gradually due to practical constraints. In fact, although the Fed has cut short-term rates by 1.75 percentage points over the past 18 months, mortgage loan rates remain near their Sept. 2024 levels. The point is that adjusting short-term rates alone has limits in pulling down long-term rates.
Mortgage loan rates are influenced not only by the Fed's policies but also by factors such as inflation expectations, global capital flows, the size of the fiscal deficit, and supply and demand in the dwellings market. Even if Warsh takes office as chair, it is still uncertain whether he will immediately embark on a rapid reduction of the Fed's asset size or adjust the pace in consideration of market stability.