Episode summary
Warsh Call for New Fed-Treasury Accord Unsettles Bond Market
Bloomberg Surveillance
· · 13 min · Guests: Richard Clarida
Summary
Richard Clarida said Kevin Warsh’s call for a new Treasury-Fed accord sounds broad, but in practice it would likely focus less on capping Treasury yields and more on how the Fed manages its own portfolio. He said the 1951 accord marked Fed independence, but a future version could center on questions like whether the Fed should hold $2 trillion of mortgage-backed securities and whether it should tilt more toward T-bills than long-dated Treasuries.
On policy, Clarida said the Fed is still caught between inflation that has stayed above target for years and signs of softer labor-market momentum. He argued that the December Fed dots already pointed to at least one rate cut in 2026, and he thinks Warsh, if confirmed and if the data cooperate, could eventually help the committee move rates toward about 3%.
Clarida also downplayed fears that tariffs have yet to leave a clear macroeconomic imprint. He said lower-than-feared tariff levels, strong tech CapEx, and companies absorbing some of the cost have helped keep GDP and inflation steadier than many expected. On bonds, he said 10-year Treasury yields have been rangebound but real rates are higher than pre-pandemic levels, leaving the market with a somewhat steeper curve and more volatility than in the last decade.
Key takeaways
- Clarida said a Warsh-era Treasury-Fed accord would likely be about portfolio composition, not a return to yield caps.
- He said the Fed still sees inflation as too high, but labor-market softness makes it reluctant to tolerate any further rise in unemployment.
- Clarida expects the December dot plot to be consistent with at least one 2026 cut and thinks rates could move toward about 3% if the data soften.
- He said tariffs have not produced the inflation shock many feared because rates came in below the most aggressive proposals and firms absorbed some costs.
- He said bond investors should expect a steeper yield curve and somewhat higher volatility than before the pandemic, even if the repricing is largely done.
Notable quotes
“Certainly. Kevin Warsh has called for a new accord with the Treasury Department”
“I think now if there is a Treasury Fed accord, it would not be so much focused on that”
“They've been pretty consistent for a while. That inflation's too high”
“I think if you calculate the actually the tariff revenue we're collecting divided by imports. It's coming in at about 10% and Liberation Day was like 35%”
How the episode opens
There are a lot of good people at the Fed, and I think that's a decision he'll he'll make. He's got a very good vice chair right now and fill it. Phil Jefferson.
But but at some point there will be a vice chair vacancy. Is that something that the committee, when he goes in front of these tough guys on the Hill, they can demand he have a vice chair of the academic schools? Well, it's not clear that that's what would be on their wish list, but possibility, I suppose.
I mean, they could request that. Certainly. Kevin Warsh has called for a new accord with the Treasury Department.
Yeah. What does he mean by that? Well, you know, this is one of those things where this is very what they call in D.C., very big tent language.
It means different things to different people. The one accord that we do know about, which is the one that was struck in 1951 between the Treasury and the Fed, was a signal moment in Fed independence because it got the Fed out of the business of essentially capping Treasury yields. In fact, as I like to teach my students.
We all know that World War Two ended in 1945, but the Fed didn't get the memo till 1951 because the Truman administration pressured the Fed to keep a cap on rates. The Fed declare independence in the accord. I think now if there is a Treasury Fed accord, it would not be so much focused on that.
It would be focused on, for example, should the Fed a hold $2 trillion of mortgage backed securities, Should the Fed, the composition of the Fed's portfolio really be tilted toward T-bills and less from holding ten and 30 year Treasuries? So I think there are a lot of conversations to have.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- warsh fed treasury accord
- quantitative tightening
- repo market volatility
- treasury bill purchases
- monetary policy outlook
Companies and tickers mentioned
- C
- Citigroup Inc.
- PIMCO
Watch the episode
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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