Warsh's Comments on the Fed's Global Role Raise Stability Concerns
Global central banks have begun to question the Federal Reserve's role as the dollar's "last resort" in times of crisis, after Fed Chair nominee Kevin Warsh signaled that the central bank's independence does not fully extend to crisis-management operations beyond interest rate policy. The primary concern: if the Fed's global footprint is narrowed, market stability could be more easily shaken when dollar liquidity pressures arise.
The dollar's dominance has historically given the Fed a key role in times of turmoil, including through liquidity facilities that keep funding flowing. Warsh—US President Donald Trump's pick—said during his confirmation hearing that independence in setting interest rates does not automatically apply to broader operations, including aspects of international finance, which he believes require closer coordination with the administration and Congress.
Warsh is expected to be sworn in soon, although no official date has been set. The Fed Board appointed Jerome Powell as chair pro tempore until Warsh officially takes office. Several other central bank policymakers—both on and off the record—said they were awaiting clarification but did not anticipate major changes in the near future, as the Fed's liquidity facility also protects the US economy, not just its global partners.
However, they cautioned that even the appearance of doubt about dollar availability could trigger turbulence. One ECB official called the situation "double-edged": the world depends on the dollar, and if it is not readily accessible, the costs will be borne by everyone—including the US. On the other hand, the Fed currently provides dollars "on demand" through standing tools to the ECB and the central banks of Canada, Japan, the UK, and Switzerland (with collateral), while other central banks can access dollars through more stringent facilities.
The rationale for the backstop is also linked to US self-interest: commercial banks abroad hold trillions of dollars in Treasury bonds. When markets are stressed, the need for liquidity can force a quick sale of these assets, exporting the shock back to the US market. The narrative of politicizing dollar access is not new—the Trump administration once provided a $20 billion liquidity line to Argentina ahead of its elections, while Gulf and Asian countries have recently sought liquidity support due to energy shocks and the impact of the Iran war. South Korean President Lee Jae Myung reportedly raised a similar issue during a meeting with US Treasury Secretary Scott Bessent.
Nomura Research Institute economist Takahide Kiuchi believes Warsh is potentially walking a "tight line" between a more dovish interest rate policy, as Trump envisions, and a more hawkish balance sheet policy. He warned that if this combination triggers disruption in the US market while oil prices remain high due to the Iran war, the yield on 10-year Japanese government bonds could rise, depressing the Japanese economy and stocks.
Some sources believe a decline in the Fed's reliability could shift some market demand to the euro, but the euro's architecture is not yet ready to take on a much larger role without major internal reforms. Ultimately, officials agreed that contingency plans only provide peripheral assistance—in a crisis, the Fed remains the dollar lender of last resort, especially with the eurodollar market estimated at US$30 trillion. Therefore, many doubt Warsh will make radical changes: he is a veteran of the Fed and the 2008 crisis, and is therefore understood to understand the stability risks of cutting swap lines, while the Fed chairman himself has only one vote on the committee. (arl)
Source: Newsmaker.id
