Trump and Kevin Warsh float new Fed-Treasury accord

The Fed-Treasury Accord was created in 1951 to stop the U.S. government from using the Federal Reserve like an ATM.

According to the US central bank, the accord set clear boundaries between the central bank and the Treasury, especially after years of political pressure during and after World War II. That agreement gave the Fed the space to actually control interest rates without being told what to do by politicians.

Before the accord, the Fed didn’t have much power. In 1942, it agreed to keep interest rates artificially low, 0.375% on short-term bills and a soft cap of 2.5% on long-term bonds, all because the Treasury asked it to.

The U.S. had just entered World War II, and the government needed to borrow a ton of money. So the Fed kept buying government debt to keep rates down, even if it didn’t want to. That meant it couldn’t control how much money was in the system. It had no choice. It had to follow the Treasury’s lead.

Fed Chair Marriner Eccles actually pushed for higher taxes and strict wage and price controls instead of flooding the system with money. But war needs cash. So the central bank fell in line until the war was over and the mess began to show.

Inflation picked up, markets got messy, and economists started demanding a change. That’s when the 1951 Accord happened, the Fed got back its independence, and monetary policy was no longer dictated by debt needs.

Trump backs tighter coordination with Treasury

Fast-forward to now. Donald Trump is back in the White House as the 47th President, and his pick for Fed Chair, Kevin Warsh, is floating the idea of a new accord. It’s not just about balance sheets or interest rates. It’s about control.

Trump made it clear last year that he thinks the Fed should be more mindful of how its policies affect government debt. Right now, the U.S. is paying nearly $1 trillion a year in interest, about half the annual deficit.

Kevin has talked about creating a written agreement with Treasury Secretary Scott Bessent. In a recent interview, he said such a deal could “describe plainly and with deliberation” how big the Fed’s balance sheet should be, and how the Treasury plans to issue debt. That might sound boring, but it could lead to a major shake-up.

A light version of the plan might just be cosmetic. But a more aggressive version could turn the Fed’s $6 trillion-plus securities portfolio upside down. Kevin isn’t alone either. Some Fed officials support dumping long-term bonds and loading up on short-term Treasury bills instead, which they say would better match how markets actually work.

Warsh could tilt Fed toward short-term debt

Deutsche Bank thinks a Warsh-run Fed could be buying short-term Treasury bills non-stop for the next five to seven years. Right now, bills make up less than 5% of the Fed’s holdings.

That number could go as high as 55% if the plan plays out. But that only works if the Treasury plays along and starts selling more bills instead of long-term debt. And that comes with a cost.

Short-term debt rolls over fast. If interest rates spike, the government’s borrowing costs jump with it.

So while this plan might seem like a way to ease the burden now, it could backfire later. A heavier reliance on bills would make the Treasury’s costs more volatile, especially in a shaky market.

None of this is locked in yet. But even without a formal accord, Wall Street is watching closely. A tighter link between the Fed and Treasury could change how bonds are issued, how rates are set, and how much control the central bank really has.

The original 1951 deal said the goal was to “assure the successful financing of the government’s requirements and, at the same time, to minimize monetization of the public debt.”

But if Trump and Kevin move forward, that balance could break… again.

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