(Reuters) -Former Federal Reserve Governor Kevin Warsh, seen as a potential successor to Fed Chair Jerome Powell, said on Thursday there needs to be a new accord between the Treasury Department and U.S. central bank, referencing a 1951 pact that separated federal debt management from monetary policy.
Warsh, now a fellow at Stanford University’s Hoover Institution, said on CNBC that such an agreement between the two agencies could smooth the process of reducing the Fed’s balance sheet by communicating intentions jointly.
“If we have a new accord, and … the Fed chair and the Treasury secretary can describe to the markets plainly and with deliberation this is our objective for the size of the Fed’s balance sheet, the Treasury can say this is our issuing calendar, and by the end of, let’s say, this administration we’ll be at an equilibrium rate on the balance sheet, so that markets will know what is coming,” he said.
The original accord, struck in March 1951, ended a period when the Fed had committed to a policy of low interest rates at Treasury’s request to allow for lower-cost federal borrowing to finance the war effort during World War Two. It is seen by Fed historians as a critical moment that established its practical independence from presidential administrations and laid the ground for how monetary policy would be set in the future.
Warsh made his remarks at a time when President Donald Trump is demanding the Fed cut rates, in part to lower the federal government’s debt service costs, which topped $1 trillion last year for the first time. Trump has said he will not pick a candidate to succeed Powell who is not on board with the president’s desire for rate cuts. The Fed last cut rates in December, before Trump’s return to the White House in January.
Warsh, who served as a Fed governor from 2006 to 2011, said his idea would not represent a return to the pre-1951 way of operating.
“That would not be working in conjunction with the administration,” he said. “It would be working with Treasury on goals that the Fed thinks are important to try and pursue and how would you present that to markets, as such, will be in conjunction.”
(Reporting by Dan Burns; Editing by Susan Fenton and Paul Simao)
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