Kevin Warsh's proposal for a new Fed-Treasury Accord has sparked debate about its potential impact on markets. Here's the lowdown:

The Plan

Warsh wants to redefine how the Fed and US Treasury work together on debt, money printing, and interest rates. His plan might involve:

Short-term focu Fed holds more short-term Treasury bills instead of long-term bonds

Smaller balance sheet: Reducing the Fed's massive $6.59 trillion balance sheet

Limited bond buying Restrictions on large bond buying programs

Coordination Closer collaboration with Treasury on debt issuance

History Lesson

The US has done something similar before. During WWII, the Fed controlled interest rates, and yields were capped. When controls ended, inflation surged, and the Fed lost independence. Japan and Australia also experimented with yield curve control, with mixed results

Market Impact

If Warsh's plan leads to lower real yields and easier liquidity, it could support risk assets like equities, gold, and crypto. However, bonds might face volatility due to reduced Fed support and heavy Treasury issuance.

Key Risks

Inflation Potential surge in inflation if Fed loses independence

Currency weakening Possible yen-like effect on the USD

Bond market volatility Steeper yield curve and higher term premiums

Markets are treating this as a long-term debate, not an immediate liquidity shock. The 10-year Treasury yield is steady at 4.247%