Kevin Warsh's Ambition as New Head of The Fed and the Heavy Burden of US Government Debt

Kevin Warsh’s Ambition as New Head of The Fed and the Heavy Burden of US Government Debt

• CNN Business

Jakarta, VIVA – Plans for new monetary policy under Kevin Warsh’s leadership face major challenges from the deteriorating fiscal condition of the United States. A surge in federal government debt is considered likely to hinder Warsh’s ambition to reduce The Federal Reserve’s role in financial markets.

Warsh is known to be pushing for The Fed to reduce its balance sheet and return to a more “normal” monetary policy with limited market intervention. However, some economists believe this move could conflict with the growing financing needs of the US government.

Pressure can be seen from rising US bond yields. Long-term Treasury bond yields have risen significantly, with the 30-year tenor exceeding 5.1 percent, a level that has not been sustained for long since before the global financial crisis of 2007–2009. Meanwhile, the yield on 2-year bonds also rose by more than 0.5 percentage points to exceed 4 percent.

This increase occurred amid concerns about rising inflation following escalating geopolitical tensions, including the conflict in the Middle East, which pushed energy prices higher.

A number of analysts believe that this condition indicates that the US bond market is starting to lose its long-term appeal as a “safe” asset, especially amid increasing government financing needs.

In this scenario, Warsh’s plan to reduce The Fed’s balance sheet—which currently stands at around US$6.7 trillion or approximately IDR 113.9 trillion (at an exchange rate of IDR 17,000 per US dollar), could create additional pressure on the bond market.

Stanford University economist Hanno Lustig believes that this approach could cause liquidity problems in the Treasury market. If The Fed withdraws too quickly, bond yields could rise further and impact borrowing costs for the government, households, and businesses.

“If they want to anticipate this, when yields react to fiscal shocks, they must be transparent… rather than considering it just a market disruption,” said Lustig, as quoted by Reuters on Sunday, May 17, 2026.

He added that in order to maintain market stability, the central bank should continue to play a role in buying bonds when there is pressure, even if this contradicts the desire to reduce intervention.