In a report on Friday, JP Morgan's chief U.S. economist Michael Feroli, wrote, "most Fed officials see balance sheet policy as just interest rate policy by other means when the short rate is constrained by being close to zero."
A bigger concern for the former Fed officials would be if Treasury could order the central bank to purchase a certain amount or type of asset. That loss of independence could spook bond markets since it could be seen as the Fed financing the deficit or allocating credit to certain sectors preferred by politicians -- actions it has already been accused of taking through its various asset purchases. It could also be seen as the equivalent of the Treasury ordering the Fed to ease policy.
Former St. Louis Fed President Jim Bullard said the idea of the Fed and Treasury cooperating to limit what the Fed can buy has long been discussed. He agreed with Bessent's criticism that the Fed loads up on assets during a crisis and never really winds them down. But he said other comments by Bessent sound like "he's talking about intimate cooperation. That's usually associated with bad outcomes."
Warsh's views on the potential relationship between the Fed and Treasury could be more conventional. Already, it is common practice -- though one not without its critics -- for the Fed to follow the administration's lead on bank supervision policy. Under President Joe Biden, it began to consider the financial cost of climate risk among the banks it regulated. It dropped that when President Donald Trump won reelection. But it has since embarked on a process of reducing the regulatory burden on banks, in line with the administration's policy goals.
A reason for these political swings is that the Fed makes regulatory policy together with other agencies headed by political appointees.
And when it comes to dollar policy, the Fed has long conceded that is the purview of Treasury.
JPMorgan points out that reducing the balance sheet could have some support on the FOMC but would take time.
"The other 11 members of the FOMC will act as a brake on any quick shift in monetary policy under Warsh," Feroli said.
Warsh may believe that by pre-emptively shedding all those other responsibilities, he can ensure the Fed's core business of setting interest rates remains independent and can never be called into question -- even by the president who nominated him.
He hinted at that view at his nomination hearing. "Presidents want lower rates, but Fed independence up to the Fed," Warsh said.