Former Federal Reserve Governor Kevin Warsh has recently advocated for a renewed accord between the U.S. Treasury Department and the Federal Reserve, a move that draws parallels to the significant 1951 agreement that reshaped monetary policy. The call, highlighted by a tweet from "zerohedge," suggests that such an accord could lead to a form of Yield Curve Control (YCC) in the United States.
Warsh, a fellow at Stanford University's Hoover Institution and reportedly a potential candidate for high-ranking economic positions in a future administration, stated, > "we need another Treasury-Fed accord." He further added, "The last time we had such an accord (in 1951), there was Yield Curve Control in the US. Clear what's coming." His remarks, made on CNBC, emphasize the need for greater coordination between the central bank and the Treasury in managing the nation's debt and the Fed's balance sheet.
The original 1951 Treasury-Fed Accord was a landmark agreement that ended the Fed's commitment to pegging interest rates at low levels to help finance World War II debt. This policy, a form of Yield Curve Control, saw the Fed maintaining specific caps on Treasury yields, such as 0.375% for bills and 2.5% for long-term bonds. The accord was crucial in re-establishing the Federal Reserve's independence from political pressure and allowing it to prioritize price stability.
Warsh's current proposal suggests a framework where the Fed chair and Treasury secretary would jointly communicate their objectives for the Fed's balance sheet size and the Treasury's issuing calendar to the markets. He believes this coordinated approach could smooth the process of reducing the Fed's substantial balance sheet, a process known as quantitative tightening. His comments come amidst ongoing debates about the Fed's independence and its response to high federal debt.
Historically, the period leading up to the 1951 accord saw inflationary pressures, with annualized inflation reaching over 20% by 1951, partly due to the Fed's continued low-interest rate policy. The agreement marked a shift towards the Fed's modern role in managing the economy through interest rate adjustments. A new accord, as proposed by Warsh, could signify a significant re-evaluation of the relationship between fiscal and monetary authorities, potentially influencing how future debt management and monetary policy are conducted.