In my Monday note, we talked about the Congressional hearing transcript from Trump's Fed Chair nominee (Kevin Warsh). More specifically, we highlighted the part where he said, Fed independence is about "operational conduct of monetary policy." And it doesn't span to "international finance."
As we discussed, providing "access to dollars" (via swap lines) is a bargaining chip for the Trump administration (to incent policy and geopolitical alignment). And with this "international finance" reference, Warsh seemed to be indicating that's a government and Fed collaboration.
Now, interestingly, this transcript is now officially on file with the Senate Banking Committee, just as it was written. But when he delivered it live on Tuesday morning, he didn't read that international finance part.
So, of all of the contents of the speech, he didn't want to draw attention to that very key point.
And as we've said, this dollar liquidity lever (international "access to dollars") is something we should expect Trump, Bessent and Warsh to pull when Warsh takes the seat at the Fed officially next month.
It's a powerful geopolitical carrot/stick to realign the world (particularly Europe) with American leadership, and to (related) deconstruct the global influence of the Chinese Communist Party.
With that in mind, what else did Warsh say?
He said "we need a smaller central bank balance sheet." The use of the balance sheet as a tool (i.e. expanding the balance sheet/quantitative easing) he described as an emergency tool, and only when rates are pinned to zero.
What is the current Fed doing? Expanding the balance sheet again.
Remember, back in December, within days of ending its program to shrink the balance sheet, the Fed flip flopped and started outright buying Treasuries again (pumping liquidity into the system).
They started with $40 billion worth of short-term Treasuries (what Powell himself described as 'big'). Nineteen weeks later, and the Fed's balance sheet has already grown by $170 billion. Moreover, back in December, Jerome Powell said the situation would require ongoing $20-$25 billion a month.
So, on the way out the door, the current Fed is pumping the balance sheet back up. And they have set expectations for the market, that a perpetual liquidity injection –– up to $300 billion a year, indefinitely, is required.
Now Warsh is telling the Senate the Fed should be doing the opposite. They should be shrinking the balance sheet. They should get out of the business of doing "fiscal policy in disguise."
If we listen to Kevin Warsh, the fiscal dominance that's been funded by the Fed for the better part of the past 18years will give way to fiscal discipline.
