Kevin Warsh’s view of Fed independence is raising questions among former officials over Treasury influence, swap lines and balance sheet policy.
Kevin Warsh’s effort to define the limits of Federal Reserve independence is drawing confusion and concern from former central bank officials, particularly over whether the Fed could retain full control of its balance sheet in a crisis.
Warsh, President Donald Trump’s nominee to lead the central bank, has said the Fed should be “strictly independent” when setting monetary policy. But he has also signaled a willingness to work with Congress and the Trump administration on “non-monetary matters,” a distinction former officials told CNBC is difficult to apply cleanly to some of the Fed’s most important tools.
The question matters because the Fed’s balance sheet, emergency lending tools and international dollar swap lines can blur the line between monetary policy, financial stability and broader economic diplomacy. In written answers after his April 21 confirmation hearing, Warsh said Fed officials “are not entitled to the same special deference in areas affecting international finance, among other matters.”
Six former Fed officials interviewed by CNBC said Warsh’s comments were unclear or confusing. Some said the implications could be modest if they lead only to a clearer division between the Fed’s monetary role and Treasury’s fiscal authority. Others warned that a broad interpretation could limit the central bank’s ability to act quickly when markets seize up.
Warsh has also floated the idea of a new “Fed/Treasury accord” that could govern the Fed’s balance sheet, though he has not detailed how such an agreement would work. Former Richmond Fed President Jeffrey Lacker said he could support an accord that left credit policy to Treasury and kept the Fed focused on monetary policy. But he warned of another possibility: “a less constructive agreement that lets the Treasury use the Fed’s balance sheet to bypass Congress, perpetuating bad practices and compromising the Fed’s independence.”
One former senior Fed official, speaking anonymously to CNBC, said that if Warsh’s position were taken to its “logical conclusion,” the Fed could lose control of its balance sheet. Warsh declined to comment to CNBC.
International swap lines are one area where the ambiguity could become practical. Such arrangements allow the Fed to provide dollars to foreign central banks in exchange for an equivalent amount of foreign currency, a tool used in past crises to ease strains in global dollar markets. CNBC reported that Treasury Secretary Scott Bessent recently said several Persian Gulf countries, including the United Arab Emirates, have requested swap lines.
Former officials told CNBC that swap lines can be viewed at least partly as monetary policy because they are approved by the Federal Open Market Committee and can expand the Fed’s balance sheet. During the financial crisis, swap lines briefly added nearly $600 billion to the balance sheet, according to Haver Analytics data cited by CNBC; during the Covid-19 pandemic, they peaked at $450 billion.
The broader concern is whether a Treasury-Fed agreement could restrict what assets the central bank may buy, or require Treasury approval for actions traditionally decided by the Fed. Former Boston Fed President Eric Rosengren told CNBC that in a severe crisis, Fed flexibility could be “hamstrung” if limits on the balance sheet delay action.
Warsh may intend a narrower outcome: shedding duties he sees as outside the Fed’s core mission so that interest-rate decisions remain insulated from politics. At his nomination hearing, he put the point this way: “Presidents want lower rates, but Fed independence up to the Fed.”
For now, the central issue remains unresolved. Warsh has not fully explained where he would draw the boundary between monetary and non-monetary powers, leaving senators, markets and former Fed officials to wait for clearer answers if his confirmation moves ahead.
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