{"id":117831,"date":"2026-05-04T11:56:01","date_gmt":"2026-05-04T11:56:01","guid":{"rendered":"https:\/\/christiancorner.us\/index.php\/2026\/05\/04\/warshs-view-on-fed-independence-is-a-source-of-confusion-and-concern\/"},"modified":"2026-05-04T11:57:20","modified_gmt":"2026-05-04T11:57:20","slug":"warshs-view-on-fed-independence-is-a-source-of-confusion-and-concern","status":"publish","type":"post","link":"https:\/\/christiancorner.us\/index.php\/2026\/05\/04\/warshs-view-on-fed-independence-is-a-source-of-confusion-and-concern\/","title":{"rendered":"Warsh’s view on Fed independence is a source of confusion and concern"},"content":{"rendered":"

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U.S. Federal Reserve nominee Kevin Warsh speaks for U.S. President Donald Trump during his confirmation hearing for the Senate Banking, Housing and Urban Affairs Committee in Washington, DC, U.S., on Tuesday, April 21, 2026.<\/p>\n

Graeme Sloane Bloomberg | getty images<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Most people don’t know and don’t have much reason to care what a currency swap line is, except that the financial tool may soon help markets understand what Federal Reserve Chairman nominee Kevin Wersh’s unique ideas about Fed independence really mean.<\/p>\n

Wersh has clearly stated that the Fed should be “fiercely independent” in making monetary policy. But he also said he was willing to work with Congress and the Trump administration on “non-monetary matters.” <\/p>\n

In response to senators’ questions after his confirmation hearing on April 21, he elaborated: “Fed officials are not entitled to the same special deference in areas affecting international finance, among other matters.”<\/p>\n

Warsh has also frequently talked about a new “Fed\/Treasury agreement”, which he has suggested could rein in the Fed’s balance sheet, although he has not yet elaborated on it. <\/p>\n

The comments from six former Fed officials interviewed for this article were vague or confusing. When it comes to the Fed’s independence, he found his analysis most worrying. The results may be benign, tinkering around the edges of existing conventions, or related to limits on the Fed’s ability to use its balance sheet in a crisis. Due to the lack of clarity in Warsh’s comments, none of the former executives who spoke to CNBC were ready to draw conclusions either way. <\/p>\n<\/div>\n

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Read more CNBC politics coverage<\/h2>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
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Former Richmond Fed President Jeffrey Lacker, who has long weighed interest rate and balance sheet policy, said he would welcome a new agreement between the Fed and the Treasury Department if it would allow the Fed to focus on monetary policy and leave credit policy to the Treasury. Under such an agreement, for example, the Fed might be limited to purchasing only Treasuries, not mortgages or other financial instruments. <\/p>\n

But Lacker said, “I can also imagine a less constructive compromise that allows the Treasury to use the Fed’s balance sheet to bypass Congress, perpetuating bad practices and compromising the Fed’s independence.” <\/p>\n

\u201cIf followed to its logical conclusion, the Fed could lose control of its balance sheet,\u201d said a former high-level Fed official, who spoke on condition of anonymity. <\/p>\n

Warsh’s views on what monetary policy is and is not are not entirely clear. He could provide further details after being confirmed by the Senate, but for now he left it to lawyers, economists and Fed observers to analyze cryptic comments like the Senate’s reactions. <\/p>\n

Warsh declined to comment for this article.<\/p>\n

One challenge facing Fed supervisors is that the distinction between monetary and non-monetary functions at the central bank may be less than clear. <\/p>\n

Several former Fed officials said swap lines occupy that gray area. Mostly used during financial crises, the Fed lends dollars to another country’s central bank and receives an equivalent amount of the foreign bank’s currency in return. Fed officials see these arrangements as providing dollar liquidity to foreign markets to prevent or reduce a scramble for dollars abroad that could overwhelm U.S. markets. <\/p>\n<\/div>\n

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Scott Bessant, Treasury Secretary, speaking at CNBC’s Invest in America Forum in Washington, DC, on April 15, 2026. <\/p>\n

Aaron Clamage | cnbc<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Treasury Secretary Scott Besant recently said that several Persian Gulf countries have requested swap lines, including the United Arab Emirates. The Treasury could provide those swap lines, as it recently did to Argentina, using the Treasury’s own funds. But what is unclear is whether Besant wants the Fed to provide them. In written questions, senators asked Warsh whether he thought the Fed would have to comply with the Treasury’s wishes, but he did not answer directly. <\/p>\n

For former Fed officials, the swap lines can be thought of as at least partly a form of monetary policy. The first clue is that they must be approved by the Federal Open Market Committee, the group charged with setting monetary policy. Second, the provision of dollars to foreign central banks when swap lines are drawn increases the balance sheet. In the Great Financial Crisis, according to data from Haver Analytics, swap lines added about $600 billion to the Fed’s balance sheet over a short period of time, or 25% of the Fed’s balance sheet at that time..<\/strong> During the COVID-19 pandemic, swap lines reached a maximum of $450 billion.<\/p>\n

Warsh’s comments may not lead to any immediate change in policy. In practice, in moments of crisis, the Fed and the Treasury work together to smooth out market chaos. This was true when Wersch served as a Fed governor during the 2007\u20132008 crisis. But the decision lies with the Fed, and the cause has almost always been a systemically significant disruption in dollar liquidity. <\/p>\n<\/div>\n

Concern about Fed balance sheet<\/h2>\n
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“In the worst outcome,” said another former Fed official, who also spoke on condition of anonymity, “the Fed’s balance sheet has become an arm of foreign aid.” <\/p>\n

This is a potential threat with swap lines for the UAE and other Gulf countries. It appears that those countries do not need them to avoid a dollar liquidity crisis, so providing them may seem like a political decision rather than a question of whether markets need them to function. <\/p>\n

Even though there was a liquidity problem in the Gulf countries, the dollar funding problem in the US is not significant yet. The UAE is a wealthy nation, with substantial reserves and sovereign wealth funds. At the same time, the administration has good reason to help an ally in the midst of the Iran war. Several officials said a dollar swap line would give the UAE international cachet usually reserved for the G-7 and other major, developed countries. <\/p>\n

Warsh is also hinting at changes that could affect much of the central bank’s operations. The revised Treasury-Fed agreement Warsh envisions would control the size and potential composition of the Fed’s balance sheet in some, as-yet-unspecified, way. This suggests that Warsh does not view balance sheet policy as an integral part of monetary policy like other Fed officials. Again, it’s not clear what Warsh means by this agreement. But the decision to buy or sell assets requires a majority vote of the FOMC, a sign that this is ultimately a monetary policy decision. <\/p>\n<\/div>\n

Warsh resigned from the Fed in 2011 over balance sheet issues.<\/h2>\n
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Both Warsh and Besant have criticized the Fed’s bloated balance sheet outside of times of crisis. In fact, it was Warsh’s objection to the Fed’s decision not to reduce its balance sheet in the wake of the Great Recession that led to his resignation as governor in 2011. <\/p>\n

Besant compared the Fed’s growing balance sheet to a dangerous lab experiment. he calls it “Benefits of Work,”<\/a> Saying that it increases the Fed’s footprint in the economy and gives it power that should be properly placed in the treasury and administration. <\/p>\n

Asked about Warsh’s idea, Bessant told CNBC on April 14, “I think, especially during the GFC, a lot of things moved from the Treasury to the Fed, which are political decisions that should be in the Treasury.” So we agree on this.<\/p>\n

But Besant did not clearly state where she agreed with Warsh. “I’m not exactly sure what they mean about the Treasury-Fed agreement,” he said.<\/p>\n

Lacker is among those who have criticized the Fed’s “credit policy”, which he defines as the Fed buying anything other than Treasuries. The Fed began buying mortgages during the Great Recession and even stepped in to buy corporate bonds during the pandemic. <\/p>\n

Warsh’s idea of \u200b\u200ba Treasury\/Fed agreement could limit the Fed to only buying Treasuries.<\/p>\n

But the Treasury\/Fed agreement may limit the Fed’s ability to use its balance sheet if, for example, the agreement requires the Fed to obtain Treasury permission to purchase assets and limits the types of assets it can purchase. <\/p>\n

“The challenge is if we have a serious crisis and fiscal policy doesn’t respond immediately,” said Eric Rosengren, former president of the Boston Fed. If the Fed agrees to limits on the size and composition of the balance sheet and requires permission to act, “the flexibility that monetary policy provides is constrained”.<\/p>\n

Rosengren recalled that one reason the Fed started buying mortgages was because there was a risk of becoming too big a player in certain parts of the Treasury market. <\/p>\n

In a report on Friday, Michael Ferroli, JPMorgan’s chief U.S. economist, wrote, “Most Fed officials view balance sheet policy as just interest rate policy in other ways, when short rates are constrained by near zero.” <\/p>\n<\/div>\n

Concerns about Treasury’s influence on the Fed<\/h2>\n
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A big concern for former Fed officials will be whether the Treasury could order the central bank to buy a certain amount or type of assets. That loss of freedom can be frightening Bond markets can be seen as the Fed financing the deficit or allocating debt to certain sectors favored by politicians \u2013 actions it has already been accused of taking through various asset purchases. This could also be seen as the equivalent of the Treasury ordering the Fed to ease policy. <\/p>\n

Former St. Louis Fed President Jim Bullard said the idea of \u200b\u200bthe Fed and the Treasury cooperating to limit what the Fed can buy has long been discussed. He agreed with Besant’s criticism that the Fed loads up assets during crises and never actually liquidates them. But he said Besant’s other comments make it sound like “he’s talking about intimate collaboration. It’s usually associated with bad outcomes.”<\/p>\n

Warsh’s views on the potential relationship between the Fed and the Treasury may be more conventional. Already, it is common for the Fed to follow the administration’s lead on bank supervision policy \u2014 though not without critics. Under President Joe Biden, it began considering the financial costs of climate risk among the banks it regulates. It dropped when President Donald Trump won re-election. But it has since begun the process of reducing the regulatory burden on banks, in line with the administration’s policy goals. <\/p>\n

One reason for these political fluctuations is that the Fed makes regulatory policy in conjunction with other agencies headed by political appointees.<\/p>\n

And when it comes to dollar policy, the Fed has long acknowledged that this is the purview of the Treasury. <\/p>\n

JP Morgan points out that reducing the balance sheet may provide some support to the FOMC but it will take time. <\/p>\n

“The other 11 members of the FOMC will act as a brake on any quick changes in monetary policy under Warsh,” Ferroli said. <\/p>\n

Warsh may believe that by relinquishing all those other responsibilities in advance, he can ensure that the Fed’s core business of setting interest rates remains independent and can never be questioned \u2013 even by the president who nominated him. <\/p>\n

He hinted at this idea at his nomination hearing. “The president wants low rates, but the Fed’s independence is up to the Fed,” Warsh said.<\/p>\n<\/div>\n

Choose CNBC as your favorite source on Google and never miss a moment of the most trusted name in business news.<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

U.S. Federal Reserve nominee Kevin Warsh speaks for U.S. President Donald Trump during his confirmation hearing for the Senate Banking, Housing and Urban Affairs Committee in Washington, DC, U.S., on Tuesday, April 21, 2026. Graeme Sloane Bloomberg | getty images Most people don’t know and don’t have much reason to care what a currency swap<\/p>\n","protected":false},"author":1,"featured_media":117832,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[56],"tags":[6829,7327,2406,2769,331,1076,20875],"class_list":{"0":"post-117831","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-bible-news","8":"tag-concern","9":"tag-confusion","10":"tag-fed","11":"tag-independence","12":"tag-source","13":"tag-view","14":"tag-warshs"},"_links":{"self":[{"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/posts\/117831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/comments?post=117831"}],"version-history":[{"count":1,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/posts\/117831\/revisions"}],"predecessor-version":[{"id":117833,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/posts\/117831\/revisions\/117833"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/media\/117832"}],"wp:attachment":[{"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/media?parent=117831"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/categories?post=117831"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/christiancorner.us\/index.php\/wp-json\/wp\/v2\/tags?post=117831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}