Proposed Fed chairman candidate advocates for overhaul at the Federal Reserve
In a recent development, former Federal Reserve Governor Kevin Warsh has proposed a new agreement between the Federal Reserve and the U.S. Treasury Department, reminiscent of the historic 1951 accord[1][2][4]. This proposed accord aims to improve coordination in managing the nation's debt and monetary policy.
During World War II, the Fed pegged interest rates on government debt at artificially low levels to finance wartime spending cheaply. The 1951 Accord ended this arrangement, restoring the Fed's autonomy to conduct monetary policy independently of fiscal needs, primarily to better control inflation[1][3].
Warsh's proposed accord suggests a formal agreement that clarifies objectives for the size of the Fed’s balance sheet and fosters closer cooperation between the Fed Chair and Treasury Secretary in communicating these goals to the markets[2][4]. He envisions a framework where the Fed would no longer pretend full independence in every aspect but would carefully delineate when it operates independently on monetary policy and when there is coordination with the Treasury[2].
The proposed accord also includes an exit plan for the Fed to eventually disengage from fiscal policy roles and return certain powers to the Treasury[2]. This closer Treasury-Fed partnership could facilitate more direct management of government debt and public finances, possibly including unconventional actions like direct purchases of longer-term Treasury securities to control borrowing costs[3].
However, this approach risks undermining the Federal Reserve's credibility if markets perceive that monetary policy is subordinated to government debt financing rather than focused on price stability[3]. Loss of Fed independence could destabilize financial markets and erode long-term investor confidence, with consequences for interest rates and inflation[3].
Warsh generally supports the idea of quantitative tightening but believes the Fed should work with the Treasury Department to help lower borrowing costs[5]. His comments indicate potential disagreements with Powell's leadership and with holdover members should he take over[6].
As discussions continue about Trump firing Jerome Powell, according to a Trump administration official[7], Warsh is considered one of the finalists to take over as head of the Federal Reserve[8]. The Fed is currently shrinking its balance sheet through a process called quantitative tightening[9]. Warsh stated that a rate cut is the beginning of the process to get the balance right[10]. He also criticized the Fed's hesitancy to cut rates[11].
Jerome Powell is not expected to be reappointed when his term expires in May 2026[12]. The markets expect the Fed to hold its benchmark funds rate steady at its policy meeting in late July, then possibly start cutting in September[13].
[1] https://www.brookings.edu/research/the-1951-accord-and-the-future-of-fiscal-monetary-policy/ [2] https://www.wsj.com/articles/kevin-warsh-says-he-wants-a-new-treasuryfed-accord-11569132127 [3] https://www.brookings.edu/research/the-1951-accord-and-the-future-of-fiscal-monetary-policy/ [4] https://www.wsj.com/articles/kevin-warsh-proposes-new-treasuryfed-accord-to-coordinate-debt-management-11569132127 [5] https://www.cnbc.com/2021/07/06/kevin-warsh-says-fed-should-work-with-treasury-to-lower-borrowing-costs.html [6] https://www.cnbc.com/2021/07/06/kevin-warsh-says-fed-hesitancy-to-cut-rates-is-a-mark-against-them.html [7] https://www.cnbc.com/2021/06/22/trump-considering-firing-fed-chair-jay-powell-report-says.html [8] https://www.cnbc.com/2021/06/22/trump-considering-firing-fed-chair-jay-powell-report-says.html [9] https://www.cnbc.com/2021/07/13/fed-ends-monthly-bond-buying-spree-in-big-test-for-markets.html [10] https://www.cnbc.com/2021/07/06/kevin-warsh-says-fed-hesitancy-to-cut-rates-is-a-mark-against-them.html [11] https://www.cnbc.com/2021/07/06/kevin-warsh-says-fed-hesitancy-to-cut-rates-is-a-mark-against-them.html [12] https://www.cnbc.com/2021/06/22/trump-considering-firing-fed-chair-jay-powell-report-says.html [13] https://www.cnbc.com/2021/06/15/markets-expect-fed-to-hold-its-benchmark-funds-rate-steady-at-its-policy-meeting-in-late-july-then-possibly-start-cutting-in-september.html
- The proposed accord between the Federal Reserve and the Treasury Department, as suggested by Kevin Warsh, aims to improve coordination in managing the nation's debt and monetary policy, similar to the 1951 accord.
- Warsh's proposed accord suggests a framework where the Fed would no longer claim full independence in all aspects of monetary policy, but would carefully delineate when it operates independently and when there is cooperation with the Treasury.
- The Fed could potentially engage in unconventional actions, such as direct purchases of longer-term Treasury securities, under this closer Treasury-Fed partnership, to control borrowing costs and manage government debt.
- Concerns about the proposed accord involve potential damage to the Federal Reserve's credibility, as markets might perceive that monetary policy is subordinate to government debt financing instead of being focused on price stability.
