Kevin Warsh, the incoming Federal Reserve chairman, has sparked debate on Wall Street, ranging from the role of bond purchases and the Fed's balance sheet to the risks to the independence of monetary policy.
On February 9, 2026, at 3:00 AM, Bloomberg News reported that Kevin Warsh, the nominee for Federal Reserve (Fed) chairman, had signaled several ideas during his campaign, but the idea that generated the most interest and debate among Wall Street investors was his call for a new deal between the Federal Reserve and the Treasury Department.
Watch expressed support for overhauling the relationship between the two institutions, citing a 1951 agreement that historically severely limited the Fed's role in bond markets, a stark contrast to the current situation where the Fed holds a large portfolio of bonds from quantitative easing (QE) implemented during the global financial crisis and the COVID-19 pandemic.
After Donald Trump nominated 55-year-old Warsh as the new Fed chairman, investors began questioning the direction Warsh intended to take in transforming the Fed. Neither Warsh nor Treasury Secretary Scott Bessent have provided detailed information about the form of such a deal.
Watch previously told CNBC that the new deal should clearly specify the size of the Fed's balance sheet, while the Treasury Department would determine the direction of government bond issuance.
Analysts believe that this agreement may be just a technical adjustment that will not significantly impact the market. However, if it is a major overhaul, including a restructuring of the Fed's asset portfolio worth over $6 trillion, it could increase volatility in financial markets and affect confidence in the Fed's independence.
This issue is even more sensitive because Trump has previously stated that the Fed should consider the interest burden of government debt when setting interest rates, which currently amounts to around $1 trillion per year in the United States.
Tim Dooey, an economist at SGH Macro Advisors, warns that if an agreement is made to tie the Fed's balance sheet to the government's borrowing plan, it could amount to directly linking monetary policy to the budget deficit, similar to the concept of yield-curve control.
Looking back, the 1951 agreement was a crucial turning point that ended the Fed's practice of pegging bond yields to help the government borrow money—a policy that had fueled inflation after World War II—and led to a reaffirmation of the Fed's independence in setting monetary policy.
Wash has criticized the large-scale quantitative easing (QE) programs of the past as violating the principles of the 1951 Agreement and contributing to excessive government debt.
Bescent holds a similar position, stating that quantitative easing (QE) should only be used in “true emergencies” and should be done in conjunction with other government agencies.
Some analysts believe that a milder version of the new deal might simply stipulate that the Fed can only make large bond purchases with the approval of the Treasury Department and must end QE as soon as market conditions permit.
A more drastic version might include restructuring the Fed's portfolio, shifting from holdings of long-term bonds to more short-term Treasury bills, to allow the Treasury Department to reduce the issuance of long-term bonds.
However, economists warn that such a link could lead investors to perceive the Fed as deviating from its core mission of controlling inflation, and in a worst-case scenario, undermine the safe-haven status of U.S. bonds and the dollar.
Another perspective suggests that Watch will primarily strive to maintain the Fed's independence and may focus more on technical cooperation than on binding formal agreements.
If Watch is confirmed and takes over from Jerome Powell in May, global financial markets will closely watch how much stronger the relationship between the Fed and the Treasury will become, and how this will affect the direction of interest rates and the U.S. bond market in the long term.
Reference: www.bloomberg.com
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