Jeffrey Lacker on What a New Fed Treasury Accord Might Look Like

**David Beckworth** (0:02)
Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I'm glad you decided to join us.
Our guest today is Jeffrey Lacker. Jeff is the former president of the Richmond Federal Reserve Bank, where he was president from 2004 to 2017 He is also a colleague of mine here at the Mercatus Center. Today, we're going to talk about the Kevin Warsh Fed, what it might mean for a new Treasury Fed Accord, and other developments in that space. Jeff, welcome back to the podcast.

**Jeffrey Lacker** (0:47)
It's a pleasure, David.

**David Beckworth** (0:48)
It's great to have you on. Now, just a little while ago, we were at the Hoover Monetary Policy Conference.

**Jeffrey Lacker** (0:55)
Palo Alto, yeah, it was a great conference.

**David Beckworth** (0:56)
It's a great place. I encourage everyone who can to go there. Give it a chance. But one of the big things that were discussed, and I definitely discussed around dinner tables, hallway conversations, is what would a new Fed Treasury Accord look like?
We're going to talk about that today because you actually had some great testimony that you did before Congress recently. In fact, you did it with our other colleague here, Tom Honig. You both got called before Congress and do what you do well, and you testified and shared your wisdom with the people on Capitol Hill. But it was also a big point of interest at the conference. And I'll just tell one story. We were having dinner one of the evenings there, and we went around the table and each person gave their view what they thought the new accord would be, and it was all different. Everyone had a different story. So we needed to be wiser, and that's why we got you here, to help us think through that. But maybe, Jeff, you could help us first set the stage by talking about the history of the accord. Could you bring this up in your testimony? So maybe start there with that.

**Jeffrey Lacker** (2:00)
Sure, yeah, it's a fascinating story. Back in 2001 at the Richmond Fed, we did a special issue of our economic quarterly, dedicated to the Fed Accord. It was the 50th anniversary. So in 1951, early 1951, the Korean War has been underway for a few months. The Fed agreed with the Treasury back in 1942 to maintain a cap on the US government security yields, to keep down the financing costs for World War II. That required the Fed to accumulate a lot of government securities and to intervene pretty often. After the war, things are back to normal, but the Treasury likes keeping its financing costs low. Under Truman and World War II, we had a surge in commodity prices, inflation was creeping up. The Fed and the FOMC strongly believed it needed the freedom to let market interest rates rise in order to reduce inflationary pressures. But Truman is a small businessman from the Midwest and strongly in favor of lower interest rates. So they got into a battle and the Treasury Secretary was pressuring the Fed to keep interest rates low. There was this famous episode where Truman invited the entire FOMC, the executive committee, I think, the FOMC, over to the White House and lectured them about the desire for lower interest rates and maintaining the yield. Fed officials go back to the office. One of them writes a memo to file saying, here's what Truman said. We didn't say anything. We didn't agree or anything. The next day, Truman calls in the press and says that the Fed agreed with me on maintaining lower interest rates and turned out not to be true, echoes famously.
Then, the Fed chair had been demoted to a mere governor by Truman's appointment of McCabe as chair. So like Powell in the current situation, a governor who had formerly been the chair, he goes to the files, takes out the memo, leaks it to the Washington Post and the New York Times, and the president's revealed as a liar. Imagine that. So Truman sues for peace, sends someone over from the Treasury to negotiate with the Fed. The secretary of the Treasury is in the hospital for some operation, and the official that negotiates with the Fed, they agree to some conditions that the Fed can let the Treasury market float, essentially let yields rise or fall.
There's some other conditions. They're stipulated in the minute. You can find them in the minutes of the meeting, of a F1C meeting.