Fed Interest Rate Hike May Put Chair Kevin Warsh on Collision Course With Trump

Federal Reserve policymakers began their two-day meeting to set interest rate policy on Tuesday, and financial markets view a rate hike as likely despite President Donald Trump's calls for lower borrowing costs.

Fed Chairman Kevin Warsh and the 11 other voting members of the Federal Open Market Committee will cast their votes on rate policy on Wednesday. Following more hot inflation data last week, bond markets estimate a more than 90% probability that the panel will increase the Fed's benchmark interest rate by a quarter-point.

It would mark the first increase to Fed rates in three years, taking the benchmark rate from its current top range of 3.75% to a new high end of 4.00%. Mortgage rates have already climbed sharply toward 7% in anticipation of the move, averaging 6.76% last week, according to Freddie Mac.

For Trump, the prospect of a rate hike comes as unwelcome news. The president has called on the Fed to cut rates, saying on Sunday: "The United States is so strong, we should be paying the lowest interest rate in the world."

Warsh, who took over the chairman's role in May, had also called for lower rates before taking the job. But the economy's resilience and persistent inflation may force his hand, with growing sentiment on the FOMC that a rate hike is necessary.

The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market, in line with the central bank's mandate of maintaining price stability and maximum employment. The Fed doesn't directly set mortgage rates, which instead move in response to the bond market.

In recent weeks, the bond market has been beset by turmoil, with the yield on the key 10-year Treasury surging above 5% to nearly a 20-year high. That move reflects investor fears about inflation, growing federal deficits, and concerns about the Warsh Fed's willingness to defy Trump and raise rates if necessary.

The 10-year Treasury yield is a key benchmark for mortgage rates, as the typical 30-year home loan is typically refinanced or closed through a home sale at around the 10-year mark. And mortgage rates show no sign of easing after hitting a 15-month high last month.

"Whether a Fed rate hike comes in September or not, the pressure on mortgage rates is here already and doesn’t show signs of relenting," says Realtor.com Chief Economist Danielle Hale. "After briefly dipping below 6% in February, mortgage rates reached 6.5% before midyear and have topped 6.7% in recent weeks."

What a rate hike means for the housing market

Abraham Sarway, a real estate agent with Douglas Elliman in New York City, says the biggest impact of a Fed rate hike this week might be the blow it delivers to consumer confidence.

"If buyers believe rates will stay higher for longer, they become more deliberate about price, timing, and leverage," he says. "That can slow transaction volume even if mortgage rates themselves do not move materially, because uncertainty tends to delay decisions before it changes values."

Sarway believes that higher-for-longer rates may not immediately affect home prices, but they may keep buyers and sellers on the sidelines until confidence returns.

Jeremy Olsher, a principal at Mizner Residential Group in Florida, remains confident.

"The housing market is not about to go over a cliff," he tells Realtor.com. But the Fed's "highly anticipated interest rate decision is forcing real estate professionals to pivot from 'waiting for relief' to navigating a persistent 'higher for longer' environment."

In Nashville, TN, Compass real estate agent Jake Kennedy says he doesn't expect the Fed meeting to change much of anything for his clients.

"Money has been expensive for a long time, and the majority of buyers and sellers have already adjusted their behavior," says Kennedy. "I will tell my clients the same thing I have been telling them for years: Don't buy or sell a house because of one Fed meeting. If you need to move, you will find a way to make the numbers work, even if it means renting for a year or two."

However, Christine Rordam, a real estate agent in Orlando, FL, is concerned that a rate hike will have the biggest impact on those who are already feeling the biggest pinch: first-time buyers and the middle class.

"Luxury buyers and sellers are not concerned with the rates as much, and many second-home buyers have enough funds to buy their rates down to begin with, so not all segments of the market will be negatively impacted," she says.

Rordam says that if mortgage rates remain at their elevated levels, sellers will be forced to compromise more on price, repairs, and concessions at closing.

"The sky is not falling, but sellers should be up to consider all offers now," she says. "Some buyers will in fact sit the market out until conditions improve."