Warsh’s Fed-Treasury accord stirs debate over policy and markets

Kevin Warsh is advocating for a “New Fed-Treasury Accord,” aimed at redefining the central bank’s role relative to the U.S. government.

As the new Fed nominee, Warsh seeks to refocus the Federal Reserve on price stability, potentially reducing its $6.6 trillion balance sheet and reallocating its holdings toward shorter-term Treasury bills. This approach would limit the Fed’s direct involvement in long-term fiscal financing.

Nevertheless, supporters argue this would stabilize the dollar, allow lower interest rates for households and small businesses without devaluing the currency, and reduce demand for safe-haven assets like gold and silver.

Critics, however, warn that the agreement could formalize coordination with the Treasury, creating “fiscal dominance” in which the Fed prioritizes government borrowing needs over inflation control, undermining confidence in both the dollar and U.S. Treasuries.

The bond market has already reacted, with higher yields and increased volatility as traders anticipate a smaller Fed presence in long-term Treasuries and a possible steepening of the yield curve, while any perception of fiscal coordination could raise doubts about the Fed’s independence and the market-driven pricing of government debt.

The market remains cautious and volatile, responding to every new signal about how the Accord will be structured, and the trajectory of the 2026 bull market may hinge on Warsh’s Senate confirmation hearings, where he will be expected to clarify the Accord’s scope and its implications for monetary policy and the Treasury market.

Benedetta Zimone