The Treasury-Fed Accord was an agreement between the US Department of the Treasury and the Federal Reserve, announced on 4 March 1951, that ended the Fed's obligation to hold down interest rates on government debt. Since 1942 the central bank had bought whatever Treasury securities were needed to keep their yields at fixed levels. The accord let the Fed stop pegging those prices and use monetary policy to control inflation instead.
The accord is the founding moment of modern monetary policy independence in the United States. It was not a law or a change to the Federal Reserve Act; it was a short joint statement, issued by both agencies, saying the two agencies had reached "full accord" on debt management and monetary policy. It is often cited today in debates about yield curve control and monetary financing of government deficits.
Treasury-Fed Accord in plain terms
Imagine a shop owner who promises a big customer that one product will always cost the same, no matter what. To keep that promise, the owner buys up any stock that would otherwise be sold cheaply and keeps printing vouchers to pay for it. That works during an emergency, but over time the vouchers flood the town and everything else gets more expensive.
During the Second World War, the US central bank made that kind of promise to the government: it would keep the price of government bonds fixed, so borrowing for the war stayed cheap. After the war, the promise forced the central bank to keep creating money, which fed rising prices. The 1951 agreement let the central bank drop the promise and get back to its real job of protecting the value of money.
The wartime peg
After the United States entered the war in December 1941, the Treasury needed to borrow on a huge scale through war bonds and marketable securities. In April 1942, at the Treasury's request, the Fed committed to keep yields on three-month Treasury bills at 3/8 percent and, implicitly, to cap long-term Treasury bonds at 2.5 percent. The Fed bought any securities offered at those prices, so it lost control of the amount of bank reserves and money it created. The arrangement fixed the whole yield curve by administration rather than by the market.
The conflict of 1950 and 1951
The peg outlasted the war. Consumer prices rose 17.6 percent between June 1946 and June 1947, and the Fed was allowed to lift short-term rates somewhat but not to abandon the 2.5 percent ceiling. When the Korean War began in June 1950, prices surged again, reaching an annualized rate of 21 percent by February 1951. Fed officials argued that defending bond prices meant creating reserves without limit, which Marriner Eccles, a Fed governor and former chairman, publicly called an "engine of inflation." President Harry Truman and Treasury Secretary John Snyder wanted the peg kept to protect bondholders and the cost of the national debt. After Truman met the Federal Open Market Committee on 31 January 1951, the White House said the Fed had pledged to support the peg. Eccles disputed this by releasing the committee's own account of the meeting to the press. On 19 February the Fed told the Treasury it would no longer maintain the existing arrangement.
Terms of the accord
With Snyder in hospital, Assistant Secretary of the Treasury William McChesney Martin negotiated with Fed staff. Under the deal:
- The Fed would stop pegging long-term government bond prices and let market interest rates rise.
- The Fed would support the price of five-year notes for a short transition, after which the market would be on its own.
- The two agencies would coordinate debt management and monetary policy but treat them as separate responsibilities.
Long-term yields rose above 2.5 percent once support ended, and holders of long bonds faced price falls of the kind now recorded as unrealized losses. Fed Chairman Thomas McCabe resigned, and Martin was sworn in as chairman on 2 April 1951.
Legacy
Martin led the Fed until 1970 and built its practice of setting short-term rates to lean against inflation, famously describing the central bank's role in a 1955 speech as taking away the punch bowl just as the party warms up. Freed from the peg, the Treasury bill yield became a market price that later served as the benchmark risk-free rate, and longer yields began to reflect investors' own views of inflation and growth, so the shape of a normal yield curve once again carried information about the economy. The accord is a reference point whenever a central bank buys large amounts of government debt, as in the quantitative easing programmes after 2008 and Japan's yield curve control from 2016 to 2024. Economists still disagree about how complete the Fed's independence became, since it continued to consider Treasury financing needs for years afterwards.