KEY POINTS
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Kevin Warsh’s strong anti-inflation stance could impact construction by influencing borrowing costs. His focus on controlling inflation, even at the expense of short-term economic pain, is critical for this rate-sensitive industry.
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A 50-basis-point drop in the Federal Funds Rate in 2026 may lower short-term borrowing costs, aiding construction firms managing supply chain issues. However, excessive rate cuts risk triggering inflation instead of promoting healthy growth.
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Long-term debt rates, such as those for commercial real estate and mortgages, depend more on inflation expectations than on short-term rates. Warsh’s credibility in maintaining low inflation could stabilize these rates, supporting construction growth.
Kevin Warsh’s Inflation Stance and Its Impact on Construction
The White House announced the nomination of Kevin Warsh to serve as Chairman of the Board of Governors of the Federal Reserve System. If Warsh is confirmed as Federal Reserve chair, construction companies will be dealing with a central bank led by someone known for being very responsive to inflation and for taking a hard stance against letting it get out of control, even if it comes at the cost of short-term economic pain.
Such rate discipline matters greatly for a rate-sensitive industry like construction, where significant spending is highly dependent on the ability to access capital at affordable rates.
Short-Term Rate Cuts and Their Implications
Currently, the anticipated path for the Fed Funds Rate (FFR), which is set by the 12 members of the Federal Open Market Committee (FOMC) and not the discretion of the Fed Chairman alone, is for a 50-basis-point (0.50%) drop in 2026.
This expectation for two 25-basis-point (0.25%) cuts in the second half of 2026 would reduce rates on revolving loans and debts tied to the PRIME rate.
This move in interest rates would be helpful for firms today that are using borrowed money to invest in inventory as they manage supply chain volatility and unpredictable product pricing. There is one caveat to all of this.
While lowering the FFR can help promote additional spending and thus economic activity, there is also a possibility for too much of a good thing. If the Fed eases conditions too much, as it did during COVID, the economy could experience a jolt of inflation rather than healthy growth.
Additionally, business owners should understand that the FFR’s impact on interest rates is constrained mainly to short-term debt with durations of around 2 years or less. Longer-dated debts with 5-year, 10-year, and longer maturities are less influenced by the FFR and more by future inflation and market risk expectations.
Long-Term Debt and Market Credibility
The rates on Commercial Real Estate (CRE) and home mortgage debt use the 5- and 10-year portions of the yield curve, which lie beyond the near-term segment of the rate curve influenced by the FFR.
Therefore, if CRE rates are to decline from their current level and, in turn, bolster new construction, the Fed needs to have credibility amongst financial market players, known as “primary dealers”, that it will make the hard choices when necessary to keep future inflation in check.
Mr. Warsh is a candidate for Chairman whose history makes him a credible figure for achieving the kind of long-term, low-inflation environment that would be ideal for construction.
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