fed

Recently, the upcoming Fed Chair Kevin Warsh has called for a new FED TREASURY ACCORD, basically a framework that would decide how the Fed and the U.S Treasury work together on debt, money printing, and interest rates.

This is not only about rate cuts.

Yes, markets expect Warsh to support rate cuts over time, possibly bringing rates down toward the 2.75%–3.0% range.

But the bigger story is what happens behind the scenes.

Warsh has long argued that the Fed’s massive balance sheet, built through years of bond buying pulls the central bank too deep into government financing.

So his plan could involve:

- The Fed holding more short term Treasury bills instead of long term bonds.

- A smaller overall balance sheet.

- Limits on when large bond buying programs can happen.

- Closer coordination with the Treasury on debt issuance.

And this is where history matters. Because the U.S. has already done something very similar before. During World War II, government debt exploded from about $48 billion to over $260 billion in just six years. To manage borrowing costs, the Fed stepped in and controlled interest rates directly.

Short-term yields were fixed near 0.375% and Long-term yields were capped near 2.5%.

If yields tried to rise, the Fed printed money and bought bonds to push them back down. This policy is known as Yield Curve Control. It helped the government borrow cheaply during the war.

But it came with consequences.

Once wartime controls ended, inflation surged sharply. Real interest rates turned negative. And the Fed lost independence over monetary policy. By 1951, the system broke down and the famous Treasury Fed Accord ended yield caps.

Now fast forward to today.

U.S. debt levels are again near World War II levels relative to the economy. Interest payments alone are approaching $1 trillion per year. Even a small drop in long term yields would save the government tens of billions in financing costs. That fiscal pressure is why Warsh’s proposal is getting so much attention.

Other countries also tried something similar.

- Japan ran yield curve control from 2016 to 2024.

Its central bank ended up owning more than 50% of government bonds. Yields stayed low, but the yen weakened and bond market liquidity suffered.

- Australia tried a smaller version in 2020–2021.

When inflation surged, they were forced into a messy exit that hurt central bank credibility.

Across all these cases, the pattern was similar:

Borrowing costs stayed low. Liquidity stayed high. Currencies weakened. Exits were difficult.

If Warsh’s framework leads to lower real yields, rate cuts, and easier liquidity conditions, that usually supports risk assets like equities, gold, and crypto.

Because when bond returns fall, capital looks for higher-return alternatives. But bonds themselves could face volatility.

Less Fed support for long term yields combined with heavy Treasury issuance could steepen the yield curve and push term premiums higher and that's why this could become the most important structural shift in U.S. monetary policy since the 1940s yield curve control era.
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