(Mike Maharrey, Money Metals News Service) One of the top candidates to succeed Jerome Powell at the Federal Reserve said the central bank needs to coordinate more closely with the U.S. Treasury and advocated for a much more inflationary monetary policy.
Kevin Warsh served as a Federal Reserve governor from 2006-2011. He is widely regarded as one of the top three or four candidates to take the reins at the Fed when Powell’s term ends in May 2026 (or sooner if Trump forces him out).
During a recent interview with CNBC, Warsh called for a regime change at the central bank, citing its reluctance to cut interest rates.
“Their hesitancy to cut rates, I think, is actually quite a mark against them. It’s as if they’ve lost some of the credibility. Truth is, in economics and inflation, bygones are not bygones. The specter of the miss they made on inflation, it has stuck with them. So, one of the reasons why the president, I think, is right to be pushing the Fed publicly is we need regime change in the conduct of policy.”
The interviewer directly asked Warsh if he thought Trump should fire Powell.
“I think regime change at the Fed will happen in due course.”
Warsh Wants More Inflation
Like President Trump, Warsh is an outspoken advocate of interest rate cuts, arguing that price inflation is under control. His statements indicate he believes the central bank has moved too slowly in the past. During the interview, he said the central bank should look beyond the “one-off” change in prices due to tariffs.
But make no mistake – this is a call for more inflation.
While the CPI has cooled significantly (the June uptick notwithstanding), the money supply has been increasing for over a year. This is, by definition, inflation. Rising prices are just one result of this monetary inflation.
The bottom line is the Fed never did enough to slay the inflation dragon.
Rate cuts would likely accelerate the expansion of the money supply by incentivizing more borrowing. In a fractional reserve banking system, each new loan injects new money into the financial system. It isn’t as quick and clean as money creation via quantitative easing (QE), but it is inflationary nonetheless.
But to be fair, there is a valid case to be made for rate cuts. While people like Warsh would never say it out loud, the U.S. economy is addicted to easy money. It is loaded up with debt and simply can’t function in a normal interest rate environment over the long term. Higher interest rates don’t play well with massive levels of debt.
For instance, interest on the national debt cost $144.6 billion in June. That brought the total interest expense for the fiscal year to $921 billion, up 6 percent over the same period in 2024. It’s apparent, given the federal debt load, that Uncle Sam needs some interest rate relief.
U.S. corporations and consumers are also loaded up with debt.
A higher interest rate environment will eventually crack the debt-riddled economy and pop the bubbles. The economy needs its easy money drug. However, a few good CPI reports notwithstanding, inflation is far from dead.
Simply put, the Federal Reserve is in a Catch-22. It simultaneously needs to cut rates to prop up the easy money-addicted economy and hold rates steady (or even raise them) to keep inflation at bay.
A Fed Partnership With the Treasury?
Warsh also signaled a need for better coordination between the Federal Reserve and the U.S. Treasury.
In other words, he’d be perfectly fine with shedding the illusion of Federal Reserve independence.
Powell has repeatedly stated that he doesn’t take fiscal issues, such as the national debt, into account when setting monetary policy. Warsh would take a different approach.
“We need a new Treasury fed accord, like we did in 1951, after another period where we built up our nation’s debt, and we were stuck with a central bank that was working at cross purposes with the Treasury. That’s the state of things now.”
What does this mean?
Warsh is referring to a Federal Reserve–Treasury Accord, agreed to on March 4, 1951.
During World War II, the central bank pegged interest rates on government debt with short-term rates at 0.375 percent and long-term rates around 2.5 percent. This allowed the federal government to borrow cheaply to fund the war effort.
Under the 1951 agreement, the Fed was no longer obligated to peg interest rates to help the Treasury. The central bank regained autonomy to conduct monetary policy aimed at controlling inflation, reestablishing at least the illusion of Federal Reserve independence.
It’s not completely clear what Warsh is proposing, but it seems he wants to go back to a scenario where the Fed is more actively involved in coordinating with the federal government to facilitate borrowing.
“If we have a new accord, then the … Fed chair and the Treasury secretary can describe to markets plainly and with deliberation, ‘This is our objective for the size of the Fed’s balance sheet.’”
Reading between the lines, this seems to imply Warsh would be open to using quantitative easing to create demand in the bond market, lowering borrowing costs.
In QE operation, the Fed buys Treasuries on the open market and holds them on its balance sheet. This creates artificial demand for U.S. debt, raising bond prices and lowering yields. QE during the Great Recession and the pandemic allowed the U.S. government to borrow more than it could have under normal market conditions.
However, QE is extremely inflationary because the central bank buys bonds with money created out of thin air and injects it into the financial system. Between the 2008 financial crisis and the pandemic, the Fed injected nearly $9 trillion into the economy. This resulted in the spate of price inflation we suffered through after the pandemic.
Currently, Warsh seems more interested in trying to rein in borrowing costs with rate cuts, saying, “I think the Fed has the balance wrong. A rate cut is the beginning of the process to get the balance right.”
In fact, the central bank has much less control over rates than it would have you believe. The Fed can cut its federal funds rate, and that has a significant impact on the short end of the curve. But longer-term rates are much less impacted by Fed interest rate manipulation. In fact, longer-term Treasury yields have gone up since the Fed’s 1 percent cut in 2023/2024.
In practice, if the Federal Reserve really wants to coordinate with the Treasury, QE may be the only avenue. The fact that Warsh seems open to this approach should concern anybody worried about inflation.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
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