Federal Reserve Chair Kevin Warsh acknowledged Friday that housing is under strain. He did not suggest that the strain is severe enough to steer the Fed away from another interest-rate hike.
In his first address to the Federal Reserve Bank of Kansas City’s annual economic policy symposium in Jackson Hole, Wyoming, as Fed chair, Warsh isolated housing and agriculture as weak spots in an economy he otherwise described as resilient.
“Credit and loan markets are showing few signs of policy restraint,” Warsh said. “Certain sectors — like housing and agriculture — are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.”
That assessment leaves the mortgage industry facing an uncomfortable reality: Housing can remain constrained by elevated borrowing costs without becoming weak enough to stop the Fed from tightening monetary policy again.
Warsh did not commit to an increase at the Federal Open Market Committee’s Sept. 15–16 meeting. But his assessment of the economy, coupled with his insistence that inflation must move convincingly toward the Fed’s 2% target, prompted markets to sharply increase their expectations for a September hike.
Before the speech, futures markets assigned a roughly 35% probability to a quarter-point increase in September. The probability climbed to about 60% afterward.
Barclays now expects the Fed to raise its benchmark rate by 25 basis points in September and again in December, reversing its previous forecast that rates would remain unchanged through the end of the year.
Housing Is The Exception
Warsh described an economy that has strengthened despite geopolitical and supply-chain shocks.
Business investment is growing at its fastest rate since 2021, consumer spending remains healthy, corporate credit is readily available, and unemployment remains low, he said. Warsh characterized the labor market as “quite stable” and consistent with full employment.
Those conditions give the Fed room to concentrate on inflation, even while housing remains under pressure.
“The Fed’s predominant focus right now should be on prices,” Warsh said.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, increased 3.7% over the 12 months ending in July, according to Warsh. On a six-month basis, PCE inflation ran at a 4.1% annualized rate.
Warsh said inflation remains widespread across the economy, not limited to a few categories. Over the past year, prices rose more than 3% for 54% of the 199 goods and services tracked by the PCE index. That share has declined from a post-pandemic peak of about 77% but remains well above the pre-pandemic average of 32%.
“And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh said.
That interpretation is more hawkish than the market reaction to July’s inflation report. The Consumer Price Index rose just 0.1% in July, reducing pressure for a September hike without establishing a clear path to lower mortgage rates.
Warsh made clear that one or two encouraging readings will not be enough.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Otherwise, we have work to do. That’s our job … our mandate … and our charge to keep.”
Jobs Data May Not Restrain The Fed
Warsh’s description of a stable labor market also contrasts with concerns raised by the July employment report.
Payrolls declined by 23,000 in July, while revisions eliminated 103,000 jobs previously reported for May and June. At the time, NMP reported that the weak employment figures raised the bar for a September rate increase but did not remove inflation from the Fed’s calculation.
Warsh placed less weight on weak monthly job growth, arguing that lower immigration and slow labor-force growth mean the economy requires fewer new jobs to maintain full employment. The unemployment rate remains at 4.1%, while initial unemployment claims are near historically low levels, he said.
“In general, though, people who want to work, by and large, are holding or finding jobs,” Warsh said.
With the labor market stable and inflation above target, housing weakness alone appears unlikely to make the case for holding rates steady.
A Quieter Fed Could Mean Louder Market Swings
Warsh also used the speech to reject the extensive forward guidance investors have come to expect from the central bank.
Forward guidance became a regular Fed tool during the 2008 financial crisis, but Warsh said the practice has “overstayed its welcome” outside periods of genuine economic distress.
“Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray,” he said.
Warsh argued that policymakers need the freedom to respond to changing conditions rather than make early commitments about the future path of rates.
“A quieter Fed, more purposeful in its communications, is better able to meet its objectives,” he said.
For mortgage professionals, less guidance could mean greater sensitivity to each inflation, employment, energy, and consumer-spending report. Without a clearly signaled Fed path, new data could produce more abrupt moves in Treasury yields, mortgage-backed securities, and lender rate sheets.
That risk is not theoretical. Following Warsh’s speech Friday, the two-year Treasury yield rose more than 12 basis points, mortgage-backed securities lost roughly three-eighths of a point, and mortgage rates reached a three-week high.
The market response reinforces the warning from the Fed’s July meeting. Warsh’s limited forward guidance was already making economic reports more likely to trigger sudden repricing.
It also builds on the volatility mortgage companies have faced throughout 2026. Rapid movements in Treasury yields and mortgage-backed securities have complicated lock decisions, disrupted pipelines, and caused borrowers to hesitate as geopolitical developments and energy prices repeatedly changed the inflation outlook.
Warsh ended his Jackson Hole address without promising a September hike or ruling one out.
“I stand here today committed to a discipline, not to a decision,” he said.
For the mortgage industry, however, the discipline Warsh described carries a clear implication: The Fed sees the pain in housing. For now, it sees more inflation risk everywhere else.
