Warsh’s take on Fed independence is met with confusion, concern
Kevin Warsh, chairman of the Federal Reserve’s nominee for U.S. President Donald Trump, during his Senate Banking, Housing and Urban Affairs Committee confirmation hearing on Tuesday, April 21, 2026 in Washington, DC, United States.
Graeme Sloan | Bloomberg | Getty Images
Most people don’t know what a currency exchange line is and have little reason to care about it; But this financial tool may soon help markets understand what Federal Reserve Chairman nominee Kevin Warsh’s unique ideas about Fed independence really mean.
Warsh said categorically that the Fed should be “absolutely independent” in setting monetary policy. But he adds that he is willing to work with Congress and the Trump administration on “non-monetary issues.”
In response to senators’ questions after his confirmation hearing on April 21, he issued the following statement: “Fed officials are not entitled to the same special deference in areas affecting international finance, among other matters.”
Warsh has also frequently talked about a new “Fed/Treasury deal” that he suggests could manage the Fed’s balance sheet, but he hasn’t yet delved into the details of that deal.
Those comments were vague or confusing at best, according to six former Fed officials interviewed for this article. They found his analysis alarming at worst when it comes to the Fed’s independence. The consequences could be benign, tweaking the edges of existing contracts, or more related to restricting the Fed’s ability to use its balance sheet in a crisis. Given the lack of clarity in Warsh’s comments, none of the former officials who spoke to CNBC were ready to jump to any conclusions yet.
Former Richmond Fed President Jeffrey Lacker, long a hawk on interest rate and balance sheet policy, said he would welcome a new agreement between the Fed and the Treasury Department if it led the Fed to focus on monetary policy and leave credit policy to the Treasury. For example, under such an agreement the Fed might be limited to buying only Treasury securities, not mortgages or other financial instruments.
But Lacker added: “I could also imagine a less constructive deal that would allow the Treasury to use the Fed’s balance sheet to bypass Congress, perpetuating bad practices and compromising the Fed’s independence.”
“If taken to its logical conclusion, the Fed could lose control of its balance sheet,” said a former senior Fed official, speaking candidly and on condition of anonymity.
Warsh’s views on what monetary policy is and what it is not are not entirely clear. He could elaborate on the issue once he’s confirmed by the Senate, but for now he’s left it to lawyers, economists and Fed watchers to decipher cryptic comments like those in the Senate responses.
Warsh declined to comment for this article.
One challenge for Fed watchers is that the distinction between the central bank’s monetary and non-monetary functions is less than clear.
Swap lines occupy this gray area, several former Fed officials said. Often used during times of financial crisis, the Fed gives dollars to another country’s central bank and receives an equal amount of the foreign bank’s money in return. Fed officials see these regulations as ensuring dollar liquidity in foreign markets to prevent or reduce the dollar struggle abroad that could affect US markets.
Treasury Secretary Scott Bessent speaks at CNBC’s Invest In America Forum in Washington DC on April 15, 2026.
Aaron Clamage | CNBC
Treasury Secretary Scott Bessent recently said many countries in the Persian Gulf, including the United Arab Emirates, have requested swap lines. The Treasury can provide these swap lines using its own funds, as it recently did with Argentina. But what is unclear is whether Bessent wants the Fed to provide them. Senators asked Warsh in written questions whether he believed the Fed would need to comply with the Treasury’s requests, but Warsh did not directly answer.
Swap lines can be thought of as monetary policy at least in part, according to former Fed officials. The first clue is that they must be approved by the Federal Open Market Committee, the group tasked with setting monetary policy. Second, providing dollars to foreign central banks increases the balance sheet when swap lines are drawn. During the Great Financial Crisis, swap lines briefly added almost $600 billion to the Fed’s balance sheet, or 25% of the Fed’s balance sheet at the time, according to data from Haver Analytics.. During the Covid-19 epidemic, swap lines reached a maximum of 450 billion dollars.
Warsh’s comments may not mean an immediate change in policy. In practice, in times of crisis, the Fed and Treasury work together to resolve market chaos. This was also true when Warsh worked as a Fed governor during the 2007-2008 crisis. But the decision remains the Fed’s, and its rationale has almost always been a systemically significant disruption to dollar liquidity.
Fed balance sheet concern
“In the worst case scenario, the Fed’s balance sheet becomes an arm of foreign aid,” said another former Fed official, who asked to remain anonymous.
This is the potential danger of swap lines for the UAE and other Gulf countries. These countries do not appear to need them to stave off a dollar liquidity crisis, so providing them may seem like a political decision rather than a question of whether markets need them to function.
Even if there is a liquidity problem in the Gulf countries, there is currently no dollar funding problem in the USA. The UAE is a rich country with significant reserves and sovereign wealth funds. At the same time, the administration has ample reason to help an ally in the middle of the Iran war. Several officials said the dollar swap line would provide the UAE with international value normally reserved for the G-7 and other large, developed countries.
Warsh also points to changes that could affect much larger parts of the central bank’s operations. The revised Treasury-Fed agreement that Warsh envisions would determine the size and potential composition of the Fed’s balance sheet in a way that has not yet been specified. This suggests that Warsh, like other Fed officials, does not view balance sheet policy as an integral part of monetary policy. Again, it is unclear exactly what Warsh meant by this agreement. But a decision to buy or sell assets requires a majority vote from the FOMC, signaling that this is ultimately a monetary policy decision.
Warsh resigned from the Fed in 2011 over balance sheet issues
Both Warsh and Bessent have criticized the Fed’s inflated balance sheet outside of times of crisis. In fact, it was Warsh’s objection to the Fed’s decision not to shrink its balance sheet in the wake of the Great Recession that led him to resign as chairman in 2011.
Bessent likened the Fed’s growing balance sheet to a dangerous laboratory experiment. he says “gain of function” This, he says, increases the Fed’s footprint in the economy and gives it the power it should rightfully wield in the Treasury and the administration.
“Especially during the GFC, I think a lot of the political decisions that had to be made at the Treasury were moved from the Treasury to the Fed,” Bessent told CNBC on April 14 when asked about Warsh’s opinion. “So we agree on that.”
But Bessent did not explain exactly where he agreed with Warsh. “I’m not sure exactly what you mean about the Treasury-Fed deal,” he said.
Lacker is among those criticizing the Fed’s shift to “credit policy,” which he defines as buying everything except Treasuries. The Fed began buying mortgages during the Great Recession and even embarked on corporate bond purchases during the pandemic.
Warsh’s idea of a Treasury/Fed deal would limit the Fed to only buying Treasuries.
However, the Treasury/Fed agreement may limit the Fed’s ability to use its balance sheet, for example, if the agreement requires the Fed to get permission from the Treasury to purchase assets and the types of assets it can purchase.
“The problem is that we are facing a serious crisis and fiscal policy is not reacting quickly,” former Boston Fed President Eric Rosengren said. If the Fed agrees to impose limits on the size and composition of its balance sheet and needs permission to act, “the flexibility provided by monetary policy is inhibited.”
Rosengren reminded that one of the reasons the Fed is buying mortgages is the risk of becoming too big a player in certain parts of the treasury market.
“Most Fed officials view balance sheet policy as interest rate policy implemented through other means in which the short interest rate is constrained to near zero,” Michael Feroli, J.P. Morgan’s chief U.S. economist, wrote in a report on Friday.
Concerns about Treasury’s influence on the Fed
A bigger concern for former Fed officials will be whether the Treasury will order the central bank to buy a certain amount or type of assets. This loss of independence can be frightening Because this negatively affects bond markets as it can be seen as the Fed financing the deficit or allocating credit to certain sectors preferred by politicians; actions he is currently accused of committing through various asset purchases. This could also be seen as the equivalent of the Treasury instructing the Fed to ease policy.
Old St. St. Louis Fed President Jim Bullard said the idea of the Fed and Treasury teaming up to limit what the Fed can buy has long been discussed. He agreed with Bessent’s criticism that the Fed loaded up on assets during the crisis and never fully reduced them. But he said Bessent’s other comments appeared to “speak of close collaboration. This is often associated with poor outcomes.”
Warsh’s views on the potential relationship between the Fed and the Treasury may be more traditional. It is already common practice for the Fed to follow the administration’s lead on bank supervision policy—albeit not without its critics. Under President Joe Biden, the financial cost of climate risk is beginning to be taken into account among the banks it regulates. That rate dropped when President Donald Trump was re-elected. However, since then, a process has been initiated to reduce the regulatory burden on banks, in line with the administration’s policy objectives.
One reason for these political swings is that the Fed creates regulatory policy in conjunction with other institutions headed by political appointees.
And when it comes to dollar policy, the Fed has long acknowledged that’s the Treasury’s purview.
JPMorgan states that shrinking the balance sheet may provide some support to the FOMC, but it will take time.
“The other 11 members of the FOMC will act as brakes on any rapid change in monetary policy under the Warsh administration,” Feroli said.
Warsh may believe that by abdicating all these responsibilities in advance, he can ensure that the Fed’s core job of setting interest rates remains independent and can never be questioned, even by the president who nominated him.
He hinted at this view at his nomination hearing. “Presidents want lower interest rates, but the independence of the Fed depends on the Fed,” Warsh said.
