Key Takeaways
- •Rep. Frank Lucas (R, OK-3) announced he will introduce a resolution calling for a formal dialogue between the Federal Reserve and Treasury to redefine their respective authorities.
- •Thomas Hoenig (Distinguished Senior Fellow, The Mercatus Center at George Mason University) testified that a new accord is needed to prevent the Fed from becoming a permanent buyer of debt.
- •Rep. Juan Vargas (D, CA-52) and William English (Eugene F. Williams, Jr. Professor of the Practice, Yale School of Management) discussed how executive pressure on interest rates threatens statutory independence.
- •Republicans argued that high deficits risk "fiscal dominance" over monetary policy, while Democrats focused on protecting the Fed from political interference and executive branch legal threats against its leadership.
- •This hearing sets the stage for legislative efforts to clarify the Fed's role in Treasury markets as the national debt is projected to reach $40 trillion this year.
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Hearing Analysis
Overview
The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity held a hearing titled "Revisiting the Treasury-Fed Accord" to examine the 75-year-old agreement that established the independence of the Federal Reserve System (Fed) from the United States Department of the Treasury (Treasury). Chairman Frank Lucas (R, OK-3) opened the hearing by noting that while the 1951 Accord successfully delineated the roles of the two institutions—assigning monetary policy to the Fed and debt management to the Treasury—the current economic landscape of high debt-to-GDP ratios and massive Fed balance sheets necessitates a modernized dialogue. Chairman Lucas announced his intention to introduce a resolution calling for a formal framework to bolster Treasury market resilience while reinforcing monetary independence.
Policy Proposals
The witnesses provided a range of perspectives on the necessity of a new accord. Mr. Thomas Hoenig, Distinguished Senior Fellow at the Mercatus Center at George Mason University, argued that a new accord is essential because the Fed has moved beyond its mandate to become a "ready buyer" of federal debt through quantitative easing (QE). He warned that with gross federal debt reaching $40 trillion and annual deficits projected at $2 trillion, the Fed faces "fiscal dominance," where it may be forced to monetize debt to prevent interest rate spikes. Dr. Jeffrey Lacker, Senior Affiliated Scholar at the Mercatus Center at George Mason University, proposed five specific elements for a restated accord: limiting the Fed's balance sheet to a minimal level of reserves, returning to a "bills-only" portfolio to leave long-term debt management to the Treasury, setting only one interest rate (on reserves), and establishing a framework where credit policy is conducted by the Treasury with congressional authorization.
Industry Impact
Dr. Jeffrey Huther, Adjunct Professor at Georgetown University, discussed the evolution of the Treasury market since 1951, noting that while the market is currently deep, the projected path of deficits could eventually lead to instability that forces Fed intervention. Mr. William English, Eugene F. Williams, Jr. Professor of the Practice at the Yale School of Management, defended the current institutional protections provided by the Banking Act of 1935. He argued that while the Fed and Treasury should provide more clarity on future plans, a formal new accord might not be necessary and could even signal a loss of independence if it appeared the Treasury was dominating Fed decision-making.
Overview
The hearing highlighted sharp partisan differences regarding the primary threat to Fed independence. Ranking Member Juan Vargas (D, CA-52) and Rep. Sean Casten (D, IL-6) focused on executive branch interference. Rep. Vargas criticized the President for attempting to fire Fed Governor Dr. Lisa Cook and for the United States Department of Justice (DOJ) opening a criminal inquiry into Chairman Jerome Powell. He cited the President’s posts on Truth Social as evidence of an attempt to "bend the Fed to his will" to lower interest rates and save on federal interest costs. Conversely, Republican members, including Rep. Marlin Stutzman (R, IN-3) and Rep. Monica De La Cruz (R, TX-15), focused on "fiscal dominance" driven by congressional spending. They argued that the sheer volume of debt issuance forces the Fed into a position where it must choose between allowing interest rates to spike or monetizing the debt and fueling inflation.
Industry Impact
The discussion also touched on the impact of these policies on the broader economy. Rep. De La Cruz highlighted that rising deficits could lead to higher core inflation, costing households hundreds of dollars in disposable income and making homeownership unattainable for young Americans. There was also a notable debate regarding emergency lending. Rep. Scott Fitzgerald (R, WI-5) questioned whether emergency lending should be moved entirely to the Treasury. While Mr. English argued the Fed is better equipped due to its market expertise, Dr. Lacker suggested that the Fed's discretionary lending has created market fragility by inducing a dependence on "official mothering" and suggested that such roles should eventually transition to the Treasury or require direct congressional action.
Overview
The hearing concluded with Chairman Lucas emphasizing the need for discipline in addressing the fiscal path. Witnesses were asked to provide follow-up responses to written questions by April 22, 2026. The primary industry impact identified was the financial services sector, specifically Treasury market participants, brokers, and dealers, who would be affected by changes in the Fed's portfolio composition or intervention rules.
Organizations mentioned during the hearing included: - Federal Reserve System (Fed): The central subject of the hearing, discussed regarding its independence, balance sheet size, and role in monetary policy. - United States Department of the Treasury (Treasury): Discussed as the entity responsible for debt management and its historical and future relationship with the Fed. - United States Department of Justice (DOJ): Mentioned by Rep. Vargas regarding its criminal inquiry into Chairman Powell. - Republic of Argentina, Republic of Türkiye (Turkey), and Republic of Zimbabwe: Cited by witnesses and members as cautionary examples of hyperinflation resulting from a lack of central bank independence. - George Mason University and Mercatus Center: The academic affiliations of witnesses Hoenig and Lacker. - Congressional Budget Office (CBO): Referenced regarding its projections of $2 trillion annual deficits. - Truth Social: Mentioned as the platform where the President criticized the Fed's interest rate policies. - Freddie Mac and Fannie Mae: Mentioned by Mr. English regarding the Fed's purchase of mortgage-backed securities. - Yale School of Management and Georgetown University: The academic affiliations of witnesses English and Huther. - Joint Economic Committee (JEC): Cited by Chairman Lucas for its historical role in the 1951 Accord. - Office of the Comptroller of the Currency (OCC): Mentioned regarding its historical removal from the Fed's Board of Governors. - Medicare and Social Security: Cited by Rep. Vargas as major federal expenses now rivaled by interest payments on the national debt.
Transcript
The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is entitled Revisiting the Treasury-Fed Accord. Without objection, all members will have five legislative days within which to submit extraneous material or to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. Welcome to today's task force hearing, Revisiting the Treasury-Fed Accord of 1951. Seventy-five years ago this month, the Department of the Treasury and the Federal Reserve System reached full accord with respect to debt management and monetary policies. What we know today as the Treasury-Fed Accord. This agreement clearly delineated the roles and responsibilities of the two institutions. That is, the Fed is responsible for monetary policy in accordance with its dual mandate, and the Department of the Treasury is responsible for funding the government at the least cost to the taxpayer over time. In the 81st Congress, and yes, I wasn't here for that session, just one year prior, the Joint Economic Committee expressed support for the Fed and Treasury to reach an understanding about the division of their authorities. It was appropriate for Congress to be a part of the conversation then, just as it is now. It is my intention for this Congress to similarly express the need for a formal dialogue between the Fed and Treasury on the appropriate boundaries of their authority, and where increased communication might bolster the strength, resilience, and depth of the Treasury market, while reinforcing monetary policy independence. I plan to introduce a resolution to do just that. This is because quite a few changes have occurred in the last 75 years. Our nation's deficit to GDP ratio has ballooned from less than 2 percent to nearly 6 percent. As we've discussed many times in this task force, the Treasury market cannot continue to function well if the supply of Treasuries outpace market capacity to absorb it. As Chairman Powell has said numerous times, the country is on an unsustainable fiscal path. He is not the first chairman to say so, but I hope he is the last. Rising debt servicing costs push all parties involved into tough choices. We can't let fiscal irresponsibility interfere with the Fed's ability to do its job. Additionally, the Fed has moved to an ample reserve regime to allow stronger monetary policy rate control and is engaged in four rounds of quantitative easing, thereby significantly increasing the size of the Fed's balance sheet. As the Fed adjusts the size of its balance sheet through QE, QT, and reserve management purposes, increased forward communication with the Treasury Department could improve coordination between the two entities without jeopardizing monetary policy independence or stoking inflation. In 2009, the Treasury and the Fed issued a joint statement outlining the Fed's role in financial and monetary stability, while leaving credit allocation to fiscal authorities. While we are in normal economic times, that's kind of an interesting thing to say about right now, isn't it? The two entities should discuss their appropriate bounds of responsibility and the risk encroachment imposes. I look forward to hearing from our expert witnesses today and engaging in a robust discussion. And I would note to the ranking member, this is really an amazing panel we have here, experience beyond measure, and I look forward to the insights that we're going to gain. And with that, I yield back and I recognize the ranking member of the task force, Mr. Vargas, for four minutes for an opening statement.
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