Warsh Call for Fed-Treasury Accord Stirs Debate in $30 Trillion Bond Market

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• A Warsh-led Fed would likely be an active buyer of Treasury bills for the coming five to seven years, with T-bills rising to as much as 55% of its holdings from less than 5% now in one scenario

  80% confidence

• One of the central bank's duties in setting interest rates is to mind the government's debt costs

  80% confidence

• Fed should conduct QE in true emergencies and in coordination with the rest of government

  80% confidence

• Investors will read a new accord as implying that Bessent will have a soft veto on any quantitative tightening plans

  80% confidence

• Rather than insulating the Fed, an accord could look more like a framework for yield-curve control. A public agreement that synchronizes the Fed's balance sheet with Treasury financing explicitly ties monetary operations to deficits

  80% confidence

• The Fed had effectively violated the 1951 principles with its massive waves of bond purchases after the financial crisis and the pandemic

  80% confidence

• In a Warsh-Bessent world, the reduction of the Fed's balance sheet could be mapped to a predictable Treasury debt plan to give markets clarity on liquidity and supply. If Treasury issuance and Fed's balance sheet path is steady and credibly telegraphed over the long term, accidental tightening of financial conditions can be avoided and any unforced shocks in rates markets would be limited

  80% confidence

• A new accord could provide a framework for the Fed working in tandem with the Treasury and perhaps also with housing agencies Fannie Mae and Freddie Mac to shrink the size of its balance sheet

  80% confidence

• An agreement could describe plainly and with deliberation what the Fed's balance-sheet size would be, with the Treasury laying out its debt-issuance plans

  80% confidence

• A new accord could provide, over time, a framework for the Fed working in tandem with the Treasury and perhaps also with the housing agencies Fannie Mae and Freddie Mac to shrink the size of its balance sheet

  80% confidence

• The central bank damaged the market's ability to give off important financial signals by sticking with quantitative easing for too long

  80% confidence

• Warsh is going to be very independent, but mindful that the Fed is accountable to the American people

  80% confidence

• If there's an accord that implies that the Treasury can count on the Fed buying some portion of the debt or on some portion of the curve for the foreseeable future, that's hugely, hugely problematic

  80% confidence

• Fed's massive bond purchases encouraged reckless government borrowing

  80% confidence

• I wouldn't expect the Fed to do anything quickly on balance sheet reduction. They've moved to the ample-regime policy, and that does require a larger balance sheet, so I would think that they'll probably sit back, take at least a year to decide what they want to do

  80% confidence

• Warsh will be committed to keeping the Fed separate. That does not rule out greater collaboration, but it makes a formal accord less likely

  80% confidence

• We're already heading down that path of closer Fed-Treasury coordination. The question is whether it gets magnified

  80% confidence

• Outright coordination to damp interest costs might work for a while, but in the long-run, investors have alternatives to US assets. People will figure out ways around that, and over time will take their money elsewhere

  80% confidence

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