Kevin Warsh touts regime change at Fed and calls for partnership with Treasury

In the latest drama surrounding the Fed and its embattled chair, a Trump administration official on Wednesday confirmed that the president met with Republican lawmakers the previous day and discussed Trump firing Powell. The official said Trump planned to do so soon, but he denied that shortly after.

In addition to the rates issue, White House officials have criticized Powell over a multi-billion dollar renovation program at two of the Feds buildings in Washington, D.C.

Asked whether Trump should try to fire Powell, Warsh said, “I think regime change at the Fed will happen in due course.”

Trump‘s main stated reason in pushing for rate cuts has been to help lower financing costs on the nation’s $36 trillion deb, which ostensibly out of the Feds twin goals of low unemployment and stable prices.

However, Warsh seemed to take the issue a step further and suggested a coordination between the Fed and the Treasury Department in how the nation manages debt issuance.

“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,” he said. “So 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.'”

The Fed is currently shrinking its balance sheet by allowing proceeds from maturing debt to roll off, rather than being reinvested as usual. Warsh generally supports the idea, known as quantitative tightening, but recently asserted that the Fed ought to be working with Treasury to help lower borrowing costs.

“I think the Fed has the balance wrong. A rate cut is the beginning of the process to get the balance right,” he said.

However, the last time the Fed cut rates, Treasury yields actually rose.

Markets expect the Fed to hold its benchmark funds rate steady at its policy meeting in late July, then possibly start cutting in September.