The Fed’s Third Mandate
QE Forever
The Federal Reserve has officially operated under a “dual mandate” for decades: stable prices and maximum employment. However, if you look closely at recent machinations in the bond market, it becomes undeniably clear that a third, unwritten mandate has taken precedence: the funding of the United States government. We are witnessing a paradigm shift. Quantitative Easing (QE) is no longer an emergency measure for times of crisis; it is becoming the standard operating procedure.
The Stealth Liquidity Injection
The markets have been lulled into a false sense of security by the official narrative that the Fed is “tightening” or holding rates “higher for longer”. Yet, beneath the surface, a form of stealth QE is already underway. This has manifested through the manipulation of short-dated Treasuries. By focusing liquidity operations on the short end of the curve, authorities have managed to inject capital into the system without headline-grabbing announcements of massive bond-buying programs.
It is a sleight of hand. It allows liquidity to flow, keeping risk assets buoyed and the Treasury funded, while maintaining a facade of hawkish discipline. They are effectively printing money to pay the bills, but they are doing it in the shadows of the repo markets and bill issuance rather than on the nightly news.
The Era of the Monetizers: Enter Kevin Warsh
Jerome Powell has, at times, attempted to play the role of the responsible central banker, paying lip service to the fight against inflation. However, his tenure is ending. With the nomination of Kevin Warsh to succeed Powell in May 2026, the transition toward a more “compliant” Fed is nearing completion.
While Warsh built a reputation as a “hawk” during the 2008 crisis, his recent pivot, advocating for rate cuts even as the administration exerts unprecedented pressure on the central bank, suggests a new role. The debt load of the US government is compounding at a mathematical rate that makes paying it back in real terms impossible. The state is left with two choices: default or inflation. It will choose inflation.
We believe the next Fed leadership is being positioned for its willingness to engage in overt debt monetisation. The pretext of “fighting inflation” will likely be sidelined in favor of “supporting growth” or “ensuring financial stability.” This marks the start of a new, aggressive era designed to “goose” the economy to keep the fiscal engine from seizing. They will aim to inflate away the debt burden by keeping nominal GDP high, regardless of the cost to the consumer.
Why It Will Fail
This strategy is doomed to fail for several structural reasons:
The Inflationary Feedback Loop: You cannot print your way to prosperity. When the Fed monetizes debt to stimulate the economy, they increase the money supply without a corresponding increase in production. This is the textbook definition of inflation. The “goose” they are looking for will lay a rotten egg: persistent, sticky inflation that erodes the standard of living for the working class.
The Bond Vigilantes: Stealth QE works only as long as the market believes the Fed is fighting inflation. Once the pivot to full debt monetisation becomes obvious, the bond market will revolt. Yields on the long end of the curve will spike as investors demand a higher premium for holding devaluing dollars. This will crush the very economy the Fed is trying to save, as borrowing costs for mortgages and businesses soar.
The Loss of Credibility: Central banking relies entirely on confidence. Once the public realizes the Fed’s primary goal is not price stability, but bailing out fiscal irresponsibility, the game is up. We will see a flight to hard assets, further exacerbating the inflationary spiral.
Conclusion
The road ahead is clear. The authorities have chosen their path. They will attempt to inflate the debt away through new, disguised, and eventually overt forms of Quantitative Easing under new leadership. They believe they can manage this fire. They are wrong. They are simply pouring petrol on the embers of inflation, ensuring that the next conflagration will be far harder to extinguish.