A Treasury-Fed Accord, QE, QT, USD

The first Treasury-Fed Accord, in 1951 (discussed here), gave the Fed independence to set rates after years when they had been held low by the Treasury to help repay war debts.

Fed $6.5 trillion balance sheet, a legacy of the bonds it purchased to bail out the financial system after the 2008-9 crisis and the pandemic. 

Slowly and deliberatively, I believe we need a smaller central bank balance sheet, Warsh told Senators.

The issue — as Powell discovered when he tried to shrink the balance sheet in 2018 — is that selling bonds into the open market pushes up yields directly, while sucking out liquidity. 

It led to a big market selloff and a demeaning “Powell Pivot (a major shift in direction) toward cheaper rates.

Any such shrinking will have to be avoid repeating 2018.

A further issue is the dollar. Bessent has made clear that he wants lower bond yields and a weaker dollar. 

Steven Blitz of TS Lombard: “Warsh will find that the reality of large and growing deficits, the need for foreign funding, and, more critically, the equity market monster, that more than a decade of QE created, will simply limit his degree of freedom to act.”

John Authers Bloomberg April 24, 2026

https://www.bloomberg.com/opinion/articles/2026-04-24/fed-treasury-the-shape-of-a-deal-to-come

24 april

https://englundmacro.blogspot.com/2026/04/24-april-tett-carl-hamilton-camilla.html