What is the Treasury-Fed Accord of 1951, and why is it important?

Between 1942 and 1951, the Federal Reserve ceded its authority to set interest rates to the U.S. Treasury, pegging the yield on long-term Treasuries at 2.5% to help finance World War II.   President Harry Truman tried to persuade the Fed to maintain that policy during the duration of the Korean War, but with inflation running above 8% year over year, the Fed resisted. The result was a March 1951 pact between the Treasury and Fed that is widely viewed as freeing the Fed to set interest rates to achieve its congressional mandate without considering the impact on the cost of Treasury borrowing.

To what exactly did the Treasury and the Fed agree?

On March 4, 1951, the Treasury and the Fed issued a joint press release that consisted of a single sentence: “The Treasury and the Federal Reserve System have reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government’s requirements and, at the same time, to minimize monetization of the public debt.”

There was, however, a longer agreement. The text is not publicly available today, but was summarized by New York Fed President Allan Sproul several years later. As Fed economist Edward Nelson describes in a paper presented at a recent Hoover Institution conference: “[T]he  Accord was an agreement on how the two parties would act in the immediately forthcoming years as the Federal Reserve transitioned to the establishment of an active, macroeconomically-oriented monetary policy… Essentially, the transitional arrangements entailed Federal Reserve agreements not to raise short-term interest rates, and to continue management of longer-term interest rates, during the initial years after the Accord.” It wasn’t until 1953 that the Treasury-Fed link was fully severed in practice.

For a detailed and colorful account of the tensions between the Fed, the Treasury, and the Truman White House during the Korean War, see “The Treasury-Fed Accord: A New Narrative Account” by the Richmond Fed’s Robert L. Hetzel. One key moment followed a January 31, 1951, meeting between President Harry Truman and the entire Federal Open Market Committee (FOMC). Although the Fed officials made no commitments to the president, the White House issued a statement that said the Fed had “pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts.” Marriner Eccles, who (like Jerome Powell) remained a member of the Fed board after Truman replaced him as chair, leaked the Fed’s written summary of the White House meeting to the press. The headline in The New York Times, which published the full text of the Fed’s account, said: “Truman Is Disputed by Reserve Board. Record of Talk With Him Cited to Show It Did Not Pledge Bond Policy, as He Reported.”

Did the 1951 Accord establish the Fed’s independence from the President and the Treasury?

No. Nelson and other scholars—including Gary Richardson of the University of California, Irvine, and David Wilcox, a former senior Fed economist now at the Peterson Institute for International Economics and Bloomberg—observe that the Fed’s independence dates to the Banking Act of 1935. That law removed the Secretary of the Treasury and Comptroller of the Currency from the Federal Reserve Board, created the 14-year staggered terms for governors, established the current FOMC, and, and reaffirmed the provision that governors could be removed only “for cause,” rejecting proposals to have them serve at the pleasure of the president.

These scholars emphasize that during World War II, the Fed decided to acquiesce to the Treasury, but it wasn’t legally required to do so. “This historical record remains relevant…,”  Richardson and Wilcox argue in the Journal of Economic Perspectives. “If Fed independence is built on a 1951 agreement between the Fed and the Treasury, then any U.S. president could direct that the earlier agreement be overturned…However, if legislation undergirds the Fed’s independence, then the strong presumption would be that only an act of Congress changing that law or a decision of the Supreme Court…could fundamentally reshape the president’s ability to influence monetary policy.”

Nevertheless, the Accord is viewed as a watershed, establishing that the Fed would base monetary policy only on macroeconomic conditions, not on the needs of the Treasury. As Alan Greenspan, then Fed chair, said in a 1996 speech: “Through 1951…monetary policy was effectively subservient to the interests of the Treasury, which sought access to low-cost credit. With the so-called Federal Reserve-Treasury Accord of 1951, the Federal Reserve began to develop its current degree of independence.” 

Why is this relevant today?

Because new Fed Chair Kevin Warsh has talked about a new Treasury-Fed Accord. Warsh has long argued that Fed bond-buying, known as quantitative easing (QE), has allowed Congress and the president to run up a large federal debt. “The spirit of Treasury-Federal Reserve accord of 1951 is at odds with recent practice,” he said in an April 2025 speech. He has implied that a new Accord could allow the Fed to shrink its portfolio of Treasury securities, one of his stated goals.

Here’s what he said in a July 2025 interview on CNBC: “We need a new Treasury-Fed accord, like we did in 1951 after another period where we built up our nation’s debt and we were stuck with a central bank that was working at cross purposes with the Treasury. That’s the state of things now. So if we have a new accord, then the Fed chair and the Treasury secretary can describe to markets plainly and with deliberation, ‘This is our objective for the size of the Fed’s balance sheet.’”

This would be a change. Changes in the Fed’s balance sheet have long been viewed as an instrument of monetary policy and therefore the sole province of the Federal Reserve. Open market operations—the buying and selling of securities for the Fed’s portfolio—have been used since the 1920s and a $1-billion market purchase in 1932 was the Fed’s main attempt at easing policy during the Great Depression.

What does this mean in practice?

Neither Warsh nor Treasury Secretary Scott Bessent have been specific.

Some observers see a new Accord as a mechanism to pressure politicians to restrain the rising federal debt. Others focus on the maturity of the debt issued by the Treasury and the debt held by the Fed.

At a March 2026 congressional hearing, former Richmond Fed President Jeffrey Lacker said any new pact should limit Fed asset purchases to short-term Treasuries, “giving the Treasury the sole responsibility for determining the maturity composition of Treasury debt in the hands of the public.” That could constrain the Fed from pursuing QE if short-term interest rates fall to zero again—and some Fed veterans are uneasy about giving the Treasury secretary a veto over future use of QE because that would dilute the Fed’s monetary policy independence.

But in May 2026, Lacker told CNBC, “I can also imagine 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.”

At the March hearing, former senior Fed economist William English, now at Yale University, noted that the Treasury and Fed regularly share information on the maturity of the Treasury’s issuance and the Fed’s holdings, so “it is not clear to me that any new formal agreement is needed.”

During the Global Financial Crisis, the Treasury and Fed issued a joint press release in March 2009 on “the appropriate roles of the Federal Reserve and the Treasury during the current financial crisis and in the future.” The statement dealt primarily with responses to the crisis but did say: “While the Federal Reserve has traditionally collaborated with other agencies in efforts to preserve financial stability, it alone is responsible for maintaining monetary stability…The Federal Reserve’s independence with regard to monetary policy is critical for ensuring that monetary policy decisions are made with regard only to the long-term economic welfare of the nation.”