America
Kevin Warsh signals support for new Fed-Treasury accord to redefine central bank role
Kevin Warsh, Donald Trump’s nominee to lead the Federal Reserve, has signaled his support for a modernized version of the 1951 Fed-Treasury Accord, a move that would fundamentally recalibrate the relationship between the US central bank and the Department of the Treasury.
While the original 1951 agreement significantly limited the Fed’s influence on the bond market, the landscape has shifted dramatically following the purchase of trillions of dollars in securities during the global financial crisis and the Covid-19 pandemic. Today, the constraints of that historic deal are largely defunct.
Neither Warsh nor Treasury Secretary Scott Bessent have yet provided a granular roadmap for their actions once the new Fed leadership takes office. However, in a CNBC interview last year, Warsh suggested that a renewed accord could “clearly and carefully” define the scope of the Fed’s balance sheet while outlining the Treasury’s debt issuance strategies.
A renewal might manifest as a primarily bureaucratic adjustment with minimal short-term impact on the $30 trillion Treasury market. However, a more ambitious effort to overhaul the Fed’s current portfolio—which exceeds $6 trillion—could trigger heightened volatility and deepen existing anxieties regarding the independence of the US central bank.
The looming figure over these Fed-Treasury discussions is Trump, who argued last year that one of the central bank’s responsibilities in setting interest rates should be the oversight of government borrowing costs. These costs currently hover around $1 trillion annually, accounting for roughly half of the federal budget deficit.
The 1951 Accord was designed specifically to end such practices. During and after World War II, the Fed capped yields on both short- and long-term Treasury bonds to keep federal borrowing costs low. This policy, however, became a catalyst for soaring post-war inflation. In a landmark shift, the Truman administration eventually agreed to grant policymakers the autonomy to set interest rates independently, cementing the Fed’s operational sovereignty.
In April, Warsh contended that the Fed had effectively violated the principles of 1951 through the large-scale bond purchases executed in the wake of the financial crisis and the pandemic. In various interviews and speeches, he has argued that these interventions “incentivized reckless government borrowing.”
Bessent has echoed these criticisms, accusing the central bank of maintaining quantitative easing (QE) for too long, which he claims damaged the market’s ability to provide critical financial signals. The Treasury Secretary, who oversaw the vetting process for Jerome Powell’s successor, has advocated for the Fed to utilize QE only in “genuine emergencies and in coordination with the rest of the government.”
Consequently, a new agreement could explicitly stipulate that—outside of daily liquidity management—the Fed would only engage in large-scale Treasury purchases with the department’s approval, with the ultimate goal of halting monetary expansion when market conditions allow.
However, involving the Treasury in Fed decision-making in this manner is subject to varied interpretations. Krishna Guha of Evercore ISI noted that investors might interpret such a move as granting Bessent a “soft veto” over any quantitative tightening (QT) plans.
A more concrete version of the agreement would likely codify what many market participants already anticipate: a shift in the Fed’s holdings from medium- and long-term securities toward Treasury bills with maturities of 12 months or less. In this scenario, the Treasury could reduce bond sales or at least limit their increase.
In its quarterly refunding announcement on Wednesday, the Treasury Department drew a direct link between its issuance plans and the Fed’s actions, noting that it is closely monitoring the central bank’s recent increase in bond purchases.
“We are moving toward closer cooperation between the Fed and the Treasury Department,” said Jack McIntyre of Brandywine Global. “The real question is how far that cooperation will expand.”
Conversely, some investors worry that such moves could signal a pivot away from the Fed’s primary mandate of fighting inflation, potentially increasing volatility and raising inflation expectations. In a worst-case scenario, the appeal of the US dollar and the “safe haven” status of Treasury bonds could be compromised.
Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, warned: “If there is an agreement implying the Treasury can rely on the Fed to purchase a portion of the debt or a segment of the yield curve for the foreseeable future, that is very, very problematic.”
On the other hand, Mark Dowding, chief investment officer at RBC BlueBay Asset Management, argues that Warsh remains committed to keeping the Fed distinct. “This does not rule out further cooperation, but it reduces the likelihood of a formal, binding agreement,” he noted.
Others have proposed broader scenarios where the Fed becomes part of a multi-stage effort to revitalize federal influence over the bond market. Guha of Evercore ISI floated the idea of the Fed swapping its $2 trillion mortgage-backed security (MBS) portfolio for Treasuries.
While such a move faces significant hurdles and remains unlikely, one objective could be to lower mortgage rates—a key focus for the Trump administration. Last month, the President instructed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities to limit borrowing costs for prospective homebuyers.
Richard Clarida, global economic advisor at PIMCO and former Fed Vice Chair, wrote that a new accord could “provide a framework over time for the Fed to reduce its balance sheet size in coordination with the Treasury and perhaps housing agencies like Fannie Mae and Freddie Mac.”
Warsh almost certainly cannot forge a unilateral agreement with Bessent. However, several current Fed policymakers have supported shifting the portfolio toward shorter-term debt, arguing that its heavy exposure to long-term assets no longer reflects current market structures.
Strategists at Deutsche Bank have predicted that a Warsh-led Fed would be an active buyer of T-bills over the next five to seven years. In one scenario, they foresee T-bills rising from their current level of under 5% to as much as 55% of the portfolio.
Nevertheless, a Treasury shift toward selling bills rather than interest-bearing bonds would be costly. Constantly rolling over massive amounts of debt would increase the volatility of the Treasury’s borrowing costs.
Whether a formal accord is reached or not, market participants now expect a significantly tighter relationship between the Fed and the Treasury regarding bond market policy.
US commercial crude oil inventories fell to their lowest level since 2018 in the week ending June 26 as demand from domestic refineries increased, according to weekly data released by the US Energy Information Administration (EIA).
The data also showed a decline in gasoline inventories ahead of the July 4 Independence Day holiday.
The EIA reported that commercial crude oil inventories fell by 3.8 million barrels during the week to 408.4 million barrels, the lowest level recorded since September 2018.
Since Feb. 28, when the war with Iran began, total US oil inventories, including commercial crude stocks and government-controlled emergency reserves, have declined by 120.71 million barrels to 734 million barrels.
That marks the lowest level since May 1984.
The EIA said crude oil inventories at the Cushing, Oklahoma delivery hub rose by 709,000 barrels during the week after declining for nine consecutive weeks, having previously fallen below the site’s operational minimum of about 20 million barrels.
Following the data release, Brent crude futures extended their decline, with prices falling 1.6%.
US crude futures were little changed after the inventory draw came in smaller than expected, trading about 1% lower.
The EIA said refinery crude oil inputs increased by 85 per day, while refinery utilization rose by 0.5 percentage points to 96.6% during the week.
Commenting on the data, Again Capital partner John Kilduff said: “US refineries are running at full capacity, and that is an absolutely critical requirement.”
Gasoline supplied, a key indicator of demand, increased by 356,000 barrels per day last week to 9.13 million barrels per day. The data also showed US gasoline inventories fell by about 2.3 million barrels during the week to 214 million barrels.
US gasoline futures held onto gains and rose 1.1% after the report showed a larger-than-expected decline in gasoline inventories.
The American Automobile Association (AAA) said the national average retail gasoline price stood at about $3.85 per gallon.
US President Donald Trump said on Monday that gasoline retailers should immediately lower prices, warning they would face “big problems” in the future if they failed to do so. Trump urged retailers to target a price of $2.50 per gallon.
The data showed inventories of distillate fuels, which include diesel and heating oil, rose by 2.5 million barrels to 108.6 million barrels, contrary to expectations for a draw of 500,000 barrels.
US diesel futures surrendered part of their gains following the unexpected increase in distillate inventories but remained up about 0.4%.
The EIA also reported that US net crude oil imports increased by 370,000 barrels per day.
Lawyers for an American citizen who was recently released from an Iraqi prison after serving a terrorism-related sentence have alleged that their client has been detained in Türkiye at the request of the US government.
According to POLITICO, attorneys for Shawki Ahmad Sharif Omar, who was born in Kuwait and became a US citizen in the 1980s, filed a petition in federal court in Washington on Tuesday.
The petition alleges that the US government worked with Turkish authorities to prevent Omar from re-entering the United States.
Omar is being held at a deportation center in Türkiye, but his lawyers argue that he is effectively being held in the “constructive custody” of the US government. They have asked a federal judge to order his release and return to the United States.
The case has been assigned to US District Judge John Bates, who was appointed by former President George W. Bush.
Omar, who is also a Jordanian citizen, was captured by US forces in Iraq in 2004 on allegations that he had assisted Abu Musab al-Zarqawi, then the leader of al Qaeda in Iraq.
Omar drew international attention after describing the abuse and torture he said he suffered while in US military custody.
After US authorities transferred him to Iraqi custody in 2011, he was convicted of immigration-related offenses and, several years later, of terrorism charges. He remained imprisoned on those charges until April this year.
Evidence submitted by the US government during a 2008 Supreme Court case portrayed Omar as a key intermediary for Zarqawi’s organization who “facilitated the group’s connections with other terrorist organizations, brought foreign fighters into Iraq, and planned and carried out kidnappings.”
Omar and his lawyers have argued that the US evidence supporting those allegations was weak and was never substantiated.
They have also maintained that the proceedings against him in Iraq were unfair and that he was denied the right to a fair trial. His case has attracted international attention for years.
According to his attorneys, Omar was issued a temporary US passport after being released from Iraqi custody in April, but was nevertheless placed on a no-fly list, preventing him from traveling to the United States to reunite with his wife and children, who are US citizens.
The allegation that Turkish authorities are holding Omar at Washington’s request raises new questions about the US government’s legal authority to work with foreign governments to advance its border security and immigration objectives.
It would be highly unusual for the United States to ask another country to detain a US citizen in order to prevent that individual from re-entering the country, regardless of the person’s criminal record.
According to the petition, Turkish authorities detained Omar and transferred him to a deportation center. It states that he has been held at an undisclosed facility for the past week.
The filing further alleges that Turkish officials told Omar they were acting at the request of US authorities.
The complaint also includes correspondence with US State Department officials acknowledging Omar’s detention and stating that they were working with their Turkish counterparts to verify his status.
“The government cannot claim that it lacks control over petitioner’s detention after actively exercising its authority to intervene on his behalf,” Omar’s lawyers wrote.
The attorneys also argued that Omar faces “the risk of deportation to a country where he is likely to face torture, including Jordan.”
“Jordan is a country where members of Omar’s family have been questioned about his whereabouts and activities. Moreover, given that he was previously transferred there by US authorities and subjected to torture, he also faces the risk of being tortured in Türkiye at the request of the United States,” the lawyers said.
Search and rescue operations continued across Venezuela following the powerful earthquakes that struck the country, while authorities arrested four police officers in La Guaira state for allegedly taking part in looting.
According to a report by Europa Press, those detained were officers assigned to the Scientific, Criminal and Criminal Investigations Corps.
In a statement, Venezuelan police said the four officers failed to carry out their duties during search and rescue operations and instead appropriated valuables they found in the rubble.
Criminal proceedings have been initiated against the officers, who have also been dismissed from the force.
Speaking at a press conference, Venezuelan Interior Minister Diosdado Cabello condemned the officers’ actions.
“We immediately decided to dismiss the four personnel responsible for these immoral acts. They have been handed over to the justice system in accordance with the law. We will show absolutely no tolerance toward those who act against ethical and professional standards while wearing the official uniform. It is unacceptable for anyone to seek personal gain from the suffering of others. Through these actions, they have disgraced the uniform they wore,” Cabello said.
Venezuela was struck on the evening of June 24 by two earthquakes measuring between magnitude 7.2 and 7.5, occurring roughly 40 seconds apart. As of June 30, more than 1,700 people had been confirmed dead, while more than 43,000 others remained unaccounted for.
Search efforts are continuing in the affected areas, where rescue teams are still working to pull survivors from beneath the rubble.
The earthquakes that struck in June rank among the five strongest in Venezuela’s recorded history. The magnitude 7.5 quake is reported to be the country’s most powerful earthquake in the past century.
The disaster has also been recorded as the fourth and fifth strongest earthquakes to hit Venezuela since record-keeping began in 1900.
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