Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

(👇.01% from this time last week, 30-yr mortgage)

This week, we’re talkin’ the current state of the economy through the eyes of the Federal Reserve. Jerome Powell as a lame duck. Who the heck is the new Fed Chair? And what it all means for real estate in 2026.

Let’s get into it.

At its meeting on January 30th, the Federal Reserve decided to hold interest rates steady (aka a 3.5% to 3.75% target range for the federal funds rate), pausing after 75 basis points (a fancy way of saying .75%) of cuts across the prior three meetings (September, November, and December 2025).

This was as expected.

As Chair Powell described during his press conference, the U.S. economy is expanding at a solid pace and entering 2026 on “firm footing,” with resilient consumer spending and business investment, though housing remains weak. Adding that “the outlook for economic activity has clearly improved.”

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“Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated... These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs. Although the effects of tariffs on goods were most likely “a one-time price increase,” and are dissipating. In contrast, disinflation appears to be continuing in the services sector…That is a healthy development.”

Powell sees the “upside risk of inflation, and the downside risk to the labor market have diminished.”

As a result, the Fed sees “inflation resum[ing] its downward trend toward 2%.

PCE inflation was 2.8%, as of November (delayed data from the then government shutdown).

Going forward, Powell sees current policy as “neutral to somewhat restrictive,” meaning, in Powell’s view, there will only be a need to lower rates somewhat from here.

But as always, it will depend on how the inflation and labor market “data lead us.”

He also noted during questioning to be skeptical of the recent downbeat consumer surveys, something I have written about frequently, saying “there’s been a disconnect between downbeat surveys and reasonably good spending data.” So far, the consumer health measured by spending has been quite positive.

I agree.

Acknowledging this, the market is pricing in only 2 cuts, total.

One .25% in June and one .25% in October.

Then the Fed stops cutting rates, for good.

Or will they?

Back in June of last year, the Administration began a campaign to drive interest rates lower.

Front and center of that strategy was the President declaring that he would replace Chair Powell with a dovish Fed Chair, who was keen, as he is, on cutting interest rates further. Telegraphing this intent a full year in advance of Chair Powell's retirement.

At the time, he said, “In a year we will get this guy out of office, and somebody will come in and cut it a couple of points…Why doesn't he (Powell) lower these rates?”

This has been the era of a shadow Fed Chair, with interest rates slowly ticking down. Albeit with some volatility.

Add to this, other Administration officials ahving been activated to join the Campaign. Here is Director of Federal Housing FHFA Bill Pulte speaking on Bloomberg:

“[You have a Fed that is cutting rates at higher inflation [in September], and then inflation does down and they don’t cut. It’s very hard for the housing market to properly function…Even with a bit of a downward move in interest rates, I think you’d start to see the [upward] trend in housing activity.”

And here is the Vice President going a step further, calling a refusal to cut rates “monetary malpractice.”

And now we are entering a new phase of this war on interest rates, with Powell as a lame duck.

This, because last week The Presdient made his choice, announcing the nomination of Kevin Warsh as Chairman of the Federal Reserve.

Markets are forward-looking. A lame duck has very little power to move markets/the economy, and thus interest rates.

And now Mr. Market is waiting to hear from Mr. Warsh for more direct signals on how the Fed will operate under a Warsh regime.

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Ok, back to business.

So who is Kevin Warsh and what will the Fed look like under his leadership?

Warsh is a clear fiscal conservative with libertarian leanings and an inflation hawk. His overall philosophy is backing the Federal Reserve out of being involved in private business, via their balance sheet purchases of corporate debt, Tresuries and mortgage-backed securities.

Case in point, the Fed’s balance sheet has exploded in the last 20 years.

Pre-2009, the Fed’s balance sheet was sub-$1 trillion.

Under Chair Bernanke, this popped to $4+ trillion.

And under Powell, the purchasing of corporate debt, Tresuries and mortgage-backed securities expanded to $9 trillion.

Today, their balance sheet is $6.6 trillion, with Chair Powell saying they are holding this number constant.

The Fed didn’t use to do this pre-2009 and Warsh wants to end the practice.

Warsh is dogmatically against this type of financial tool, as it carries significant inflation risk. In fact, it was the reason he resigned from the Fed back in 2011, he objected to the continued purchase of debt by the Fed, when not in a time of crisis.

Warsh sees the Fed as a magnifier of economic volatility, contributing greatly to the boom and bust cycles we often experience.

He has said that he wants the Fed “out of the business of subsidizing in the economy.” To stop the Fed from “[crowding out the power of our elected Congress and their fiscal responsibility].”

He views inflation as further dividing the haves and have-nots, because folks who own assets (stocks, bonds, homes etc…) do poorly in times of high inflation, further dividing the country both financially and politically and financially.

During a recent interview he said, “One consequence of this institutional drift…is the inflation we’ve seen over the last five years. For many in this room, it hasn’t been devastating; we own financial assets. But 52% of Americans own no financial assets. They live paycheck to paycheck. Inflation has destroyed them. It’s the most regressive tax imaginable.”

Hear hear.

In fact, Warsh has often criticized the Fed’s vast multiplication of responsibilities as mission creep, straying from their core congressional mandate and meddling in the economy to its detriment.

This point of view puts him squarely in line with the opinion of current Secretary Scott Bessant, who recently published an article on the subject.

He also wants the Fed to communicate less, not more. To go from page 1 to page 16 of the paper, “[releasing the economy from the [headline] whiplash as [markets] hang on every word of their actions.”

But don’t take my word for it, here is Warsh in an interview last week

“When I joined the Fed in 2006, the balance sheet was about $880 billion. By the darkest days of the 2008 crisis, we pushed to the edge of our powers—rightfully so—to prevent a depression. The Fed was created in 1913 primarily to address panics, not to fine-tune interest rates.

But since then, the central bank has stayed on the front pages every day, for all seasons and reasons. It has become the most important economic institution in the world, with the best of intentions, playing a permanent role in banking and even fiscal policy.

Example: In 2008, we began buying government bonds issued earlier in the week. We told ourselves this was temporary crisis tooling. But we never put it away. Today’s balance sheet is an order of magnitude larger. The Fed has subsidized massive fiscal spending, camouflaging its true cost. Federal spending is up 60% in just five years—at full employment—for projects we don’t need, financed at prices we can’t afford.”

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I expect Warsh to have a dual strategy:

As a result, for us investors, mortgage rates will likely continue the trend lower. Although I don’t see this happening rapidly. In fact, the pace of rates coming down could be similar to 2025.

Complicating this is that dropping interest rates and slashing asset purchases, aka quantitative easing (QE), normally has opposite effects. So it is quite difficult to predict how overall interest rates, and thus mortgage rates, will react.

It will likely depend on the strength of the economy to drive rates up or drive rates down. However, if the economy is doing poorly, I could see the President pressuring the new Fed Chair to act, which is also quite difficult to handicap.

Ah, the humanity!….

(It’s important to note that this dual strategy should promote a healthy economy, which is what we all really want and will boost all industries, including real estate. It’s not always just about interest rates (keep reading)).

Will a Warsh Reserve mean an erosion of Fed independence?

It’s likely a mixed bag. Warsh seems to be a Fed purest/idealogue but I can’t see a world in which he totally ignores the President’s desires for lower interest rates.

To his credit, Warsh said this last week after being nominated, “I believe in operational independence in the conduct of monetary policy. The economy performs better when markets and Congress perceive the Fed is calling balls and strikes to the best of its ability.”

The nomination of Kevin Warsh is the bat signal that the bond market needs to see inflation as a more core focus, which will drive Treasuries down, and thus, mortgage rates.

However, the dual strategy of selling off bond assets from Treasury coffers and lowering the Fed Funds rate must be done delicately/slowly, else it will have no, or even the reverse, effect.

I think, conservatively, we hit 5.8% in 2026, with a range of 5.5%-5.9% by year-end. I just can’t see rates stagnating too long in the face of the vast campaign to drive down rates by the President, Secretary Bessent, FHFA Director Pulte, and now Kevin Warsh.

I wouldn’t want to be on the other side of that trade.

One last point, concerning Jerome Powell. While his appointment to Fed Chair ends in May, he could decide to stay on as a member of the Fed.

Historical precedent has been for outgoing Fed chairs to leave their governor roles as well, but Powell could decide to buck that trend if he feels threats to Fed independence are concerning enough.

Thus, the pressure campaign on Jerome Powell and the Fed could backfire if Powell decides he has a duty to stay on the Fed governor board.

Keeping his powder dry, when asked if he intends to leave after his term as chair, Jerome Powell declined to comment.

And with Powell now in lame duck status, I have a few closing thoughts on his tenure and character, which are important for us to understand…

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