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 inflation accelerated to 4.2% in May, the highest level since April 2023, driven by a surge in energy prices linked to the Iran war.
Inflation rose above 4% for the first time in three years, though the increase was broadly in line with expectations amid concerns over how far higher energy costs would ripple through the economy.
The reading marked the highest level since April 2023 and exceeded April’s 3.8% rate.
On a monthly basis, inflation increased at a slower pace than in April, potentially signaling that the worst of the recent price pressures may have passed.
Another encouraging sign was a slight decline in gasoline prices.
Asked about the Bureau of Labor Statistics report on Wednesday, President Donald Trump said, “I love inflation,” and argued that oil prices had fallen because “we destroyed 22 ships last night.”
According to the report, much of the increase in inflation stemmed from a 3.9% rise in energy prices, which pushed the 12-month increase in that category to 23.5%.
Core CPI, which excludes the more volatile food and energy components and is widely viewed by analysts as a better indicator of future inflation trends, offered some grounds for optimism.
Core prices rose 0.2% in May, down from a 0.4% increase in April and below analysts’ expectations for a 0.3% gain.
Core goods prices fell 0.1% on a monthly basis, suggesting underlying price pressures remained contained.
On an annual basis, CPI increased 2.9%, in line with economists’ expectations.
Ground beef, roast beef and steak prices declined last month, although the parasitic fly outbreak reported in the United States last week could complicate logistics for farmers and contribute to higher prices.
Food prices rose just 0.2%, while shelter costs — a key component for Federal Reserve policy decisions — increased 0.3%, half the pace recorded in April.
Shelter, which accounts for more than one-third of the CPI basket, rose 3.4% from a year earlier.
Government and industry officials stressed that the insect, whose name has attracted widespread attention, does not pose an immediate threat to food supplies.
Meanwhile, transportation services prices fell 0.6%, potentially indicating that higher energy costs have not yet spread broadly across other sectors.
Similarly, services excluding energy services — another measure closely watched for signs of oil-price pass-through effects — rose 0.3% after increasing 0.5% in April.
New vehicle prices fell 0.3%, while used car and truck prices edged up 0.1%.
However, airline fares, a clearer indicator of energy costs feeding through to consumer prices, rose 2.7%, while motor vehicle insurance prices fell 1.7%.
As for interest rates, few observers expect the Federal Reserve to cut rates when it delivers its first policy statement under new Chair Kevin Warsh next Wednesday.
Market expectations point to just one rate move this year: an increase in December.
US spending on nuclear weapons rose by 22% in 2025 compared with the previous year, according to a report published by the International Campaign to Abolish Nuclear Weapons (ICAN).
Washington spent $69.2 billion on its nuclear arsenal during the year, a figure that exceeded the combined nuclear weapons expenditures of all other nuclear-armed states.
The world’s nine nuclear powers — the United States, Russia, China, the United Kingdom, France, India, Pakistan, Israel and North Korea — increased total spending on their arsenals by 19%, reaching a record $119 billion.
China ranked second in spending with $13.5 billion. The United Kingdom spent $12.6 billion, overtaking Russia to become the third-largest spender. France’s nuclear weapons expenditure reached $7.7 billion.
According to data cited in the ICAN report, nuclear-armed states have spent a combined $471 billion on their arsenals over the past five years.
The report emphasized that the amount spent on nuclear weapons in a single day during 2025 would have been sufficient to provide food for 2 million people for a year, while total annual spending could fund the United Nations’ regular budget for 32 years.
Before those developments, Russian Foreign Ministry Ambassador-at-Large Andrey Belousov commented on the issue.
Belousov said Russia continues to insist on the withdrawal of US nuclear weapons from Europe and the dismantling of all infrastructure established in the region to support their deployment.
Under its nuclear-sharing programme, the United States has stationed nuclear weapons in NATO countries across Europe since the 1950s.
Today, US-made B61 nuclear bombs are stored at military bases in Belgium, Germany, Italy, the Netherlands and Türkiye.
Although NATO does not possess its own nuclear weapons, operational control over those weapons remains with Washington.
Earlier, the Financial Times reported that the United States was considering expanding its nuclear presence in Europe beyond the countries currently participating in the nuclear-sharing programme.
According to the newspaper, Poland and the Baltic states had expressed interest in hosting US nuclear weapons.
Sources cited by the Financial Times linked those discussions to concerns among European allies that the United States could reduce its military presence in the region.
Cryptocurrency projects linked to US President Donald Trump and his family have generated roughly $2.3 billion in gains for the family since Trump’s return to the White House, while investors have collectively lost about the same amount, according to a Reuters investigation.
The review examined four major projects associated with Trump and his family: the TRUMP memecoin, World Liberty Financial, American Bitcoin and AI Financial Corp.
According to Reuters, the value of shares or assets tied to those projects has fallen by dozens of percentage points, despite the ventures following a similar operating model.
The investigation found that the Trump family provided branding, promotional support and political visibility to the projects.
Reuters reported that the family either contributed very limited capital to the ventures or, in some cases, made no investment at all.
Investors, meanwhile, committed substantial funds to the projects on the expectation that Trump’s political position and his support for the cryptocurrency industry would generate long-term returns, the report said.
However, Reuters found that while the value of the underlying assets declined sharply over time, the Trump family continued to generate income from capital supplied by investors.
Some individuals interviewed by Reuters argued that investors entered the projects voluntarily and should have been aware of the risks involved.
Wilbur Ross, who served as commerce secretary during Trump’s first administration, said: “If people are buying something speculative, they should understand the risk. If they decided to hold on in the hope of further gains, that was their choice.”
As an example of how the model operated, Reuters cited the experience of investor Fatima Elrgadawi.
Elrgadawi invested $2,000 in the TRUMP memecoin, saying she trusted the “Trump brand.” By the end of May, however, the value of her investment had fallen to just $120.
Reflecting on the experience, Elrgadawi said she believed investors had been exposed to what is commonly known as a “pump and dump” scheme, in which prices are artificially inflated before large-scale selling triggers a sharp decline.
Iran says US strikes have rendered April ceasefire meaningless
Europeans increasingly doubt US would defend them in a conflict, ECFR survey finds
OPEC oil output falls to lowest level since 2000 amid Iran disruption
Five EU countries call for united response to US pressure on drug prices
US inflation climbs to three-year high as energy prices surge
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