The current administration has selected Kevin Warsh as the next Fed Chair. I’m sure the Kevinator will get much press time over the next few months as the market tries to figure out how to capitalize off of the changing of the guard, but here are two things Mr. Warsh previously mentioned he would do if he ran the Fed:
1. Shrink the Fed’s “giant money pile”. That was his phrase. Formally, it’s known as the $6.6T balance sheet that the Fed uses to machinate longer term interest rates by buying or selling securities.
2. Cut interest rates. Mr. Warsh has mentioned that he would reduce interest rates for everyday people and small businesses by lowering the Fed Cost of Funds Index.
When there is a lot of buying activity, the price of the underlying commodity goes up. And in the case of long-term securities like mortgages, the interest rate gets driven down. In an attempt to keep long term rates stable, the Fed has been buying debt like it’s BOGO week at the Outlet Mall. And it’s worked I suppose; mortgage rates have been relatively flat for the last two years. If the Fed starts shoveling the money pile at the market, the result will be higher mortgage rates.
