Fed-Treasury Accords
2026 03 05
David Beckworth and Peter Conti-Brown consider Three Kinds of Fed-Treasury Accords
In the first [kind], we need to change the status quo so that the Treasury gets out of the business of setting monetary policy.
The Treasury, despite the attempt of the Trump appointees to the Board, Trump rhetoric calling for lower interest rates, his attempt to dismiss a member of the Fed Board, and the DOJ suit, the Treasury is NOT in the business of setting monetary policy. Biden, to his eventual dismay, tried to claim credit for the Fed generated recovery from COVID/Putin shock cased recession, but could not escape the blame for the necessary (and erroneously unnecessary?) inflation.
[In the historical background to the 1950 “Accord: Beckworth and Conti-Brown remark:
During that time, [Eccles] worked with others—in and out of the spotlight—to secure for the Fed the freedom to let interest rates rise or fall based on the value of the public debt, rather than supporting it through debt monetization.
??? This is a novel “debt value” rule for setting monetary policy instruments. It even seems circular. The value of the public debt depends in part on Fed interest rate policy. But leaving that aside, does this mean if fiscal policy is increasing debt the Fed raises rates and reduces rates when Fiscal policy is reducing debt? But this look qualitatively like inflation targeting. What is the difference?]
In the second, we need to change the status quo so that the Fed gets out of the business of interfering with politics outside of monetary policy.
Agree, although this has almost entirely disappeared post Greenspan. If asked, the Fed can and should explain the consequences of fiscal actions for how monetary instruments would need to adjust for the Fed to hold to its income-maximizing inflation target. THAT ought not count as political interference.
In the third, we need to improve the collaboration between Treasury and Fed for better management of public debt markets to which both have important institutional roles.
Sure, why not if the “collaboration” does not impinge on the Fed’s inflation target? But is “collaboration” needed? Cannot each do what is best for public debt markets given its other’s objectives? If a smaller Fed balance sheet is desirable (for some not well explained reason [1]) the fed can just reduce IOR and raise the EFFR. It means that the private sector holds more Treasury securities and the Fed less. Why should Treasury become involved?
An outsider might well agree that managing inflation with one instrument, the EFFR, is better than with two, IOR AND the EFFR. The tricky part, however, is the transition when reducing the Fed’s balance sheet REQUIRES active management of two instrument at the same time. In effect the Fed would be temporarily adopting an additional target, income maximizing inflation PLUS balance sheet reduction.
As Beckworth and Conti-Brown point out and attempt by the Administration to implement a new “Accord”
risks validating the very opposite of a Fed-Treasury Accord. The one Accord we do not need is the alteration of a working status quo in favor of a Fed that becomes more political, a White House that becomes more involved in monetary policy decisions, or a Fed and Treasury that become more dysfunctional in coordinating their responsibilities managing the public debt.
Image prompt: “Two people shaking hands but one is holding a knife behind their back” was blocked by Bing. The one you see is by Chat GPT.
[Standard bleg: Although my style is know-it-all-ism, I don’t really think that. I know that I can be mistaken and am prone to overstate my points. Also, there is an amazing range of views and experiences among readers. Bring those to bear by commenting on these posts. Both other readers and I will benefit.]
[1] Beckworth and Conti-Brown cite Fed Vice-Chair Michael Bowman:
“First, a smaller balance sheet would minimize the Fed’s footprint in money markets and in Treasury markets… Second, holding less-than-ample reserves would return us to a place where we are actively managing our balance sheet, identifying instead of masking signals of market stress. In my view, actively managing our balance sheet would give a more timely indication of stress and market functioning issues, as allowing a modest amount of volatility in money markets can enhance our understanding of market clearing points.”
But this does not explain why a “smaller footprint” is desirable in helping the Fed achieve its inflation rate target or for some other reason.