In a hearing held on Wednesday (March 18), the House Financial Services Committee’s Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity examined the Treasury-Fed Accord, a 1951 agreement designed to separate monetary policy and government debt management.
During the hearing, task force chair Rep. Frank Lucas (R-Okla.) said he would introduce a resolution demanding a formal dialogue between the two institutions to reinforce monetary independence and bolster the depth of the Treasury market.
The hearing centered on what members called the looming threat of “fiscal dominance” — a scenario in which the central bank is forced to subordinate its inflation-fighting goals to help the government finance its debt.
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Witness Thomas Hoenig of the Mercatus Center — a free-market-focused think tank at George Mason University — testified that the U.S. is on track to incur $2 trillion in new debt, creating a “deep-seated expectation” that the Fed will intervene to maintain asset values and market stability and leading to higher inflation for the American consumer.
And Rep. Marlin Stutzman (R-Ind.) argued that unchecked federal spending will eventually lead investors to demand higher interest rates, further increasing the cost of issuing new debt.
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Before the 1951 accord, the Fed essentially served as an arm of the Treasury, required to peg interest rates at low levels to help finance the debt from World War II. The accord became the standard approach for modern central banking, theoretically separating monetary policy from debt management.
Some lawmakers are now contending that a “modernized” accord is needed to restore clear institutional boundaries and preserve U.S. financial credibility in the face of what they call unprecedented fiscal pressures.
Kevin Warsh, President Donald Trump’s choice to lead the Federal Reserve when Chairman Jerome Powell steps down, has also called for an overhaul of the accord.
Meanwhile, Matt Stoller, research director for the American Economic Liberties Project, argued last year that Fed needs to be controlled by elected leaders, saying that the central bank operating without those leaders oversights can foster “bad habits” among politicians.
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