The Fed Can't Lower Rates. Unless They Change the Math.

May 12, 2026

"Once rates come down, things will get better."

"I'm just waiting for the Fed to cut rates."

"When mortgages get back to 5%, demand floods back in and prices take off."

I keep hearing something like this from friends, neighbors, investors, borrowers...

I get it. I want the deals I'm refinancing out of to get cheaper too. We all do.

But the more I sit with it, the more I think a lot of investors are praying for the wrong thing. They want a rate cut to save them. And I don't think most of them have actually thought through what a rate cut would mean.

So let's walk through it.

Where the Numbers Actually Are

The Consumer Price Index for April came out this morning. Inflation is sitting at 3.8% annually. That's the highest reading since May 2023. (https://www.bls.gov/news.release/cpi.nr0.htm)

Core inflation, which is the one the Fed actually focuses on, is at 2.8%.

The Fed's target is 2%.

That gap matters. The Fed has held rates flat all year, and the last FOMC meeting had four dissenting votes. Highest split on the committee since 1992. Some members want to cut. Some don't. Nobody can agree, because the data isn't giving them clean cover to do anything.

Energy is part of the story. The Iran war pushed gasoline up almost 30% year over year. But it isn't just gas. Shelter is back up. Airfares are up over 20% annually. Food at home had its biggest monthly jump since 2022. Real wages just went negative for the first time in three years.

That is not a "cut rates and everything's fine" environment.

That is a "the Fed is stuck" environment. So WTF...

The Speculation Most Investors Aren't Tracking

On May 15, Kevin Warsh takes over as Fed Chair, replacing Jerome Powell. That's three days from now.

At his confirmation hearing on April 21, Warsh told the Senate Banking Committee that he wants to change how the Fed measures inflation. Right now they use core PCE, which is sitting near 3%. Warsh would prefer a "trimmed mean" measure that strips out the biggest moves on both ends of the distribution.

That trimmed mean number? 2.3%.

So with a methodology change, inflation goes from "above target" to "near target." And suddenly the Fed has cover to cut.

This isn't a conspiracy theory. He said it on the record, under oath, with a transcript anyone can read. Bank of America has written about it. The Council on Foreign Relations has written about it. Gold has already started repricing for it.

Whether Warsh actually pulls it off is a separate question. Trimmed mean has read hotter than core PCE in past environments. The current energy shock is broad enough that it might not trim out cleanly. The math doesn't always cooperate.

But the intent is on the table.

The Magical Thinking

The assumption most investors are making goes something like this.

Rates drop. Mortgages get cheaper. Buyers come back. Prices go up. Refinances make sense again. Everyone wins.

That's the dream.

It's also not how this usually plays out.

Rates dropped in 2008. Housing didn't recover in 2008. Or 2009. It bottomed in 2011 and crawled sideways in a lot of markets until 2015. The cuts didn't save anyone. The cuts happened because everything was on fire.

Rates dropping is usually the symptom, not the cure.

If rates fall in the next 12 months because unemployment is climbing, defaults are picking up, and consumer spending is softening... your buyers don't show up. Your renters can't pay. Your appraisals don't hit. Cheaper money doesn't help you if the demand side of the equation just walked out the door.

If rates fall because Warsh redefined inflation, but the underlying inflation hasn't actually changed, you get the worst of both worlds. Stagflation pressure on real assets and a Fed that can't credibly fight it.

Maybe rates do drop and the soft landing holds. Maybe.

But you can't underwrite a deal on "maybe."

Why I'm Hoping Rates Stay Up

I'll be honest with you. I have skin in this game on both sides.

I've got deals I'm refinancing out of where lower rates would help me materially. Every quarter point the Fed cuts puts real money back in my pocket on the existing portfolio.

I still want rates to stay up.

Because every month rates stay elevated, more sellers run out of patience. More investors who bought in 2022 with stretched assumptions get squeezed. More builders capitulate on inventory. More hard money lenders take properties back. More distress works through the system.

That's where the deals come from.

None of that exists if rates drop to 5% next quarter and demand floods back in.

The investors sitting on the sidelines, waiting for "lower rates to come save them," are going to look up in 18 months and realize the people who quietly bought through this window picked up the inventory at a discount they couldn't see at the time.

Get the assets now. Earn the lower rates later.

Not the other way around.

The Fed is not your business partner.

Stop building your strategy around what you think they're going to do.

May 20 With Ken McElroy

Five days after Kevin Warsh takes over as Fed Chair, Ken McElroy and I are doing a live two-hour session on what this transition actually means for interest rates, debt structures, and capital decisions over the next 12 months.

Ken went mostly quiet from 2022 to 2024 watching the environment develop. He deployed real capital in 2025. He's repositioning again right now.

My role on the call is to keep it specific. Actual numbers, actual deals, actual markets. No commentators. No "what the Fed might do." Two operators with real money in the game talking about what we're actually doing about it.

It's free. Replay is included. Live Q&A at the end where you can put your situation in front of us.

Ken and Tarl Webinar Registration May 20th

Whether or not rates drop in 2026, the playbooks from 2023 and 2024 are quietly breaking. Worth two hours of your time if you're making capital decisions over the next 12 months.

Tarl Yarber

(Once again, I personally write these...)

ONE MORE THING

If you’ve been thinking about how to become a private money lender and figure out how it works, I’m doing a free live webinar on it. I’ve sat on all sides of the table: Borrower/operator, Private Lender, Hard Money Lender.

Private Money Lending 101. May 6th, 7pm Eastern. I’ll walk through how the structure works, how to structure it, vet operators, and set up your team and more.

Replay included if you can’t make it live.