A Note on Warsh and a New Treasury–Fed Accord

Kevin Warsh, the Administration’s choice to Chair the Federal Reserve Board, has proposed that the Fed and Treasury establish a new Accord, hopefully modeled after their 1951 Accord. The earlier Accord affirmed the Fed’s right to conduct monetary policy free from Treasury fiscal dominance. As a former FOMC member who opposed QE in 2010 and is concerned that monetary policy has become subordinate to Treasury debt issuance, Mr. Warsh’s proposal is welcome. I have long been a critic of Fed policy, which, outside an immediate financial crisis, subordinates itself to the Treasury’s funding needs, causing it to buy large quantities of Treasury securities and to keep the yield curve artificially suppressed in the name of smoothly functioning markets. This has contributed to decades of misallocated resources, asset and general price inflation, and the artificial redistribution of wealth.

A new accord is needed and will require cooperation from Congress as well as Treasury if the U.S. is to assure price stability, maximum employment, and moderate long-term interest rates. Congress must carefully but steadily reduce its budget deficits and ease the pressure on Treasury to issue ever larger amounts of new debt. If Congress fails to do this, Treasury must respect the Fed’s right not to purchase quantities of Treasury debt beyond levels consistent with price stability (both asset and consumer). Failure to reach such an accord will almost certainly lead to increased market volatility, constant inflation, and slower long-term growth. The first Accord served the Nation well and its lessons should not be ignored if we hope to secure long-term economic success.