The "Shadow Fed" Pivot: Why Chris Waller Is Pushing for a July Cut

Federal Reserve policy may be on the verge of a significant pivot, not from Chairman Powell, but from the influential voice of Governor Chris Waller. Logan Mohtashami argues that Waller is acting as a "shadow Fed Chair," advocating for a preemptive July rate cut to stabilize a weakening labor market before it breaks, a move that holds profound implications for the fragile U.S. housing market.

Key Insights

Chris Waller's "Shadow Presidency": A Preemptive Strike Against a Labor Market Breakdown

"He doesn't want to wait for the labor market to break, then go, 'Oh, my God, we missed it. Oh, no, we're shocking. It happened again.' ...that's a more coherent argument to make to other Fed presidents to just get to neutral policy." - Logan Mohtashami

Logan Mohtashami posits that Fed Governor Christopher Waller is signaling a crucial policy shift by publicly calling for a July rate cut. This isn't a call for aggressive easing but a strategic move to get policy to a "neutral" setting before a significant economic downturn forces the Fed's hand. Waller's rationale, which Mohtashami endorses, is rooted in the noticeable slowdown in private-sector payrolls, a key leading indicator that is being masked by government hiring. By acting now, the Fed can avoid the classic mistake of waiting too long and then having to implement panicked, aggressive cuts after the damage is done.

This stance positions Waller as a pragmatic and coherent voice within the Fed, earning him the title of "shadow Fed Chair" from Mohtashami. His data-driven approach provides a credible alternative to both the Fed's current "modestly restrictive" stance and the politically motivated calls for "mega rate cuts." For investors, Waller’s growing influence suggests a potential policy path that is more responsive to leading economic data, potentially leading to a soft landing rather than a Fed-induced recession. His credibility could be key in persuading other Fed governors to join him, making his pronouncements far more significant than those of a typical lone dissenter.

The Housing Market's "Black Eye": Just 75 Basis Points from a Revival

"When mortgage rates just get down towards 6% both times, the builder's confidence picks up... We're only talking about 65 to 75 basis points lower. It's not that far off. Right? That's the frustrating part." - Logan Mohtashami

The U.S. housing market is currently the primary victim of the Fed's restrictive policy, a sector Mohtashami describes as having a "really, really big, ugly looking black eye." Despite a broadly expanding economy, key housing metrics are flashing warning signs: single-family starts, permits, and completed units are all falling. The Fed's high-rate policy, while intended to curb inflation, is directly choking off new housing supply and stressing homebuilders.

The frustrating part, according to Mohtashami, is how close the sector is to a recovery. The "magic number" is a 6% mortgage rate. Historical data shows that each time rates approach this level, builder confidence and buyer traffic rebound. With current rates hovering just 65-75 basis points above this threshold, a small Fed cut could be enough to stabilize and revive the entire construction ecosystem. This wouldn't ignite a speculative boom with 15-20% price gains, but it would provide enough traction to get permits growing and prevent a deeper contraction that would ultimately worsen the nation's housing shortage.

The Construction Labor Puzzle: Why Builders Aren't Firing... Yet

"New home sales are still at 2019 levels. They are very elevated compared to the existing home sales market. The builders have a massive backlog, the biggest backlog in the history of America of homes that haven't started yet." - Logan Mohtashami

A central puzzle for many economists is why homebuilders haven't initiated mass layoffs despite falling starts and permits. Mohtashami provides a clear answer: it's a combination of a historically large backlog of sold homes and the unique outperformance of the new home sales market. Builders are holding onto their skilled labor force because they are still working through a massive pipeline of homes that are sold but not yet started or completed.

Furthermore, new home sales are performing exceptionally well relative to the cratered existing home sales market. While existing sales are near historic lows, new home sales remain at healthy 2019 levels. This is because builders can offer incentives like mortgage rate buydowns, giving them a powerful advantage over individual sellers locked into low rates. However, this is a precarious balance. Mohtashami warns that this labor hoarding is not sustainable indefinitely. If rates remain high and the backlog is worked through, the industry could face a sharp decline. A modest rate cut is the key to converting this backlog into active construction and preventing a future labor market shock in the sector.

The "Fight Club" Rule of Housing: Why New and Existing Home Sales Are Different Worlds

"You do not mix up the new home sales market and the existing home sales market... We still have clowns... saying existing home prices have been down for three years because they're looking at the census data for new homes and thinking that's existing. Oh God. There are some men who just need to read a book." - Logan Mohtashami

Mohtashami emphasizes his "Fight Club rules" of housing analysis: you do not talk about the new and existing home sales markets as if they are the same thing. This is the single biggest mistake he sees from analysts, particularly "stock traders," leading to deeply flawed market conclusions. The new home sales market, while a small fraction of total sales, operates with completely different dynamics. Its supply data is complex, broken into categories of homes not yet started, under construction, and completed.

Many incorrectly look at the high "months of supply" figure for new homes (e.g., eight or nine months) and assume it represents millions of vacant, ready-to-occupy houses, forecasting a price crash. In reality, a large portion of that supply hasn't even broken ground. In contrast, the existing homes market has raw, available inventory. This distinction is critical today because builders are using their ability to offer sub-6% rates to capture market share, while the existing market is frozen. Understanding this bifurcation is essential for any investor trying to accurately gauge the health of the U.S. housing market and avoid the narrative traps set by misinterpreting the data.

Insightful Quotes

On Waller's Superiority: "He can be a little bit more coherent rather than having someone like Kevin Warsh, who was never... who would be hiking rates in this environment... nobody trusts him. They look at him as like a kind of a puppet to Trump. So I would be Team Waller here." - Logan Mohtashami

On the Fed's Destructive Power: "If you stay restrictive long enough, then you destroy the future production of housing. And here we are again." - Logan Mohtashami

On the Outperformance of New Homes: "If I took the equivalence of existing home sales and try to tag it to new home sales, new home sales would be under 300,000 today. We're already laying off probably half the single family workers at that point." - Logan Mohtashami

Market Implications

The insights from Logan Mohtashami point to a clear, actionable thesis for investors focused on the interplay between Fed policy and the real economy.

• The Waller Pivot Trade: A rate cut in July or the near future, driven by Waller's logic, would be a significant catalyst for interest-rate-sensitive sectors. The primary beneficiaries would be homebuilders (XHB, ITB), building materials suppliers, and mortgage companies. A move toward a 6% mortgage rate would unlock pent-up demand and stabilize builder revenues.

• Differentiating the Housing Market: Investors must adopt the "Fight Club" rules. The outperformance of the new home sales market means publicly traded builders with strong balance sheets (DHI, LEN, PHM) are better positioned than the broader real estate market. They can use financial incentives to create their own market, a luxury unavailable to individual sellers.

• Watching the Leading Indicators: The key data points to monitor are not just headline inflation but private-sector payrolls and the weekly housing market tracker data. A continued slowdown in private job creation would strengthen Waller's case for a cut. Stabilization or flattening in the growth of housing inventory and price cuts would signal that the market is finding a floor, making it a prime moment for a policy pivot. The risk remains that the Fed waits too long, causing the labor market to break decisively and forcing a much more chaotic and aggressive easing cycle later.