Markets are watching rate cuts.
But the real story is what happens behind the scenes.
Kevin Warsh, widely viewed as a future Fed Chair, has been calling for a new Fed–Treasury Accord — a formal framework redefining how the Federal Reserve and the U.S. Treasury coordinate on debt issuance, money creation, and interest rates.$USD1
This is much bigger than rate cuts.
🚨 It’s Not Just About Lower Rates
Yes, markets expect Warsh to eventually support rate cuts, possibly bringing policy rates toward the 2.75%–3.0% range.
But Warsh’s long-standing concern is deeper: He believes the Fed’s massive balance sheet, built through years of QE, has pulled the central bank too far into government financing.
In simple terms:
The Fed has become a silent partner funding U.S. debt.
🧠 What Warsh’s Framework Could Look Like
If implemented, a new Fed–Treasury Accord could involve:
The Fed holding more short-term Treasury bills, fewer long-term bonds
A smaller overall balance sheet
Clear limits on when large bond-buying programs can be launched
Closer coordination with the Treasury on debt issuance strategy
This would fundamentally change how liquidity enters markets.
📚 Why History Matters (A Lot)
The U.S. has done this before.
During World War II, government debt exploded from $48B to over $260B in just six years. To keep borrowing affordable, the Fed stepped in and controlled interest rates directly:
Short-term yields fixed near 0.375%
Long-term yields capped around 2.5%
If yields rose, the Fed simply printed money and bought bonds to push them back down.
This policy was called Yield Curve Control (YCC).
It worked — temporarily.
⚠️ The Cost of Yield Control
Once wartime controls ended:
Inflation surged
Real interest rates turned deeply negative
The Fed lost monetary independence
By 1951, the system collapsed, leading to the historic Treasury–Fed Accord, which ended yield caps and restored Fed autonomy.
⏩ Fast-Forward to Today
U.S. debt levels are once again near World War II levels relative to GDP.
Interest payments are approaching $1 trillion per year
Even small drops in long-term yields could save tens of billions in financing costs
That fiscal pressure is exactly why Warsh’s proposal is gaining traction.
🌍 Global Case Studies (Warnings Included)
Other countries tried similar approaches:
🇯🇵 Japan (2016–2024)
Central bank ended up owning 50%+ of government bonds
Yields stayed low, but the yen weakened
Bond market liquidity deteriorated
🇦🇺 Australia (2020–2021)
Small-scale YCC experiment
Inflation surged
Exit was messy and damaged central bank credibility
The pattern was consistent:
Borrowing costs stayed low
Liquidity remained high
Currencies weakened
Exits were painful
📊 What This Means for Markets
If Warsh’s framework results in:
Lower real yields
Gradual rate cuts
Easier liquidity conditions
That typically supports risk assets: 📈 Equities
🥇 Gold
🪙 Crypto
When bond returns fall, capital looks elsewhere.
But there’s a catch.
With less Fed support for long-term bonds and heavy Treasury issuance, bond markets themselves could become volatile. Yield curves could steepen, and term premiums could rise.
🧩 The Big Picture
This isn’t just another policy tweak.
If implemented, a new Fed–Treasury Accord could become the most important structural shift in U.S. monetary policy since the 1940s yield-curve-control era.
Liquidity may rise. Risk assets may benefit.
But bond markets could be entering a new and unstable regime.
And that’s the trade-off markets are about to face.
