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Posted on 07/21/2025 12:36:31 PM PDT by Angelino97
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.
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Lower interest rates and you will definitely increase inflation. Trump mentioned the other day that he would like to see it under 1%. Doing that would send the dollar on a downward death spiral. Good for gold though and I suggest everyone buy some.
Lower interest rates will cause an increase in inflation and is being advocated as a way to deal with the crushing accumulated debt. Lower interest on the debt, pay it down with cheaper future dollars. The problem is, this only works if congress stops digging the hole. Freeze spending at current levels for 5 years, 1%-2% interest rates, 3.5% inflation and the problem starts to go away. Finding a market for 1% - 2% t-bills might be a problem with other asset classes offering much better returns.
Looks like they really are planning on getting rid of Powell.
Rep. Anna Paulina Luna
@RepLuna
·
2h
I have formally referred Jerome Powell to the DOJ for criminal investigation.
Chairman Powell knowingly misled both Congress and executive branch officials about the true nature of a taxpayer-funded project. Lying under oath is a serious offense— especially from someone tasked
Show more
https://x.com/RepLuna/status/1947341001204633997
The dollar is already down 10% so far this year. Lower rates much lower than now, it goes into a death spiral. If you think imports cost a lot now, wait to see what happens then and the other side of the coin so to speak, exports zoom and we get outbid for our domestic products.
Insanity
Buckle up. I’m expecting Argentina levels of inflation and dollar devaluation in the not so distant future.
I get such a kick out of these economists posturing like they know how to control the economy. They make plausible arguments but their track record sucks. It reminds me of when I first interacted with investment brokers. They explained to a very untutored trustee (me). When they finished I said so we try and hedge our bets with diversity and sharpe ratio. They gasped and said NO, it’s not betting. But they were wrong it is betting & I’ve been betting w/o input from the pros for 35 years.
The economists strike me as even more clueless and arrogant. They destroy the economy while pretending to save it. As it slowly recovers from their meddling, due to factors that have nothing to do with economist actions or pronouncements economists want us to buy into their pseudoscience again.
Audit & retire the Fed. They may have some rational purposes. We should ID those as narrowly as possible and not allow them to set interest rates or meddle with our economy. They are a partisan and compromised body and their interests do not align with the American people.
“But make no mistake – this is a call for more inflation.”
Make no mistake, this writer’s chance of being right is random.
Argentina's out of control inflation has already been turned around, with their own undiplomatic firebrand with bad hair, President Milei... Inflation was 300% and is now at 25%. Poverty rates were over 54%, and are now under 33%. Immigration has been greatly restricted. 18 Federal Ministries have been cut down to 9. Thousands of government employees were let go (ARG has about the population of California). Government spending has been cut by 30%. They had their first year without a deficit in 123 years. Getting rid of Leftist policies is what HEALS economies, even though an up front shock is often a part of the process.
Trump understands the fiscal situation. Social welfare cannot be cut and he needs to support it or even increase to buy votes. But spending must decrease, taxes need to increase, and the subsidizing the “not working” part of the population needs to be scaled back.
Spenginbg cuts = no go
Tax increases = no go
Making people work = no go
So take money away with tariffs which lessens the demand side, inflate the currency which is just a slower moving default on debt and cause higher taxation both of which will eventually force people back to work.
Currency devaluation will also help increase the price and therefore demand for imports again lower the demand side.
Interest rate will increase the Fed only controls short term rates unless it simply restricts borrowing by crowing out private borrowing.
It is going to get real ugly on this course. Ask Jiimmah.
I do remember when a slice of pizza was 35 cents.
Yeah I know. I was talking about how Argentina was before Milei. Good luck trying to get Congress to cut spending like that. Won’t happen until they are forced to after a financial collapse.
Whoever is going to be the next Fed Chairman should work closely with Scott Bessent.
I think Mickey D burgers used to be 10 cents.
As a college grad, I bought gas for 29.9.
I feel that this conversation has gone on for far too long without someone saying “end the fed”.
So, “End the Fed”.
Presodent Trump wants a lower Dollar.
The Fed needs to be dissolved along with those running it.
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