Mike Dolan: Red lines of ROI-Warsh concern world finance

Kevin Warsh, the new Federal Reserve chairman, is on his way to the Federal Reserve to "clip the wings" of a bank that he believes has strayed into politics. Many countries are afraid that this will only give the 'U.S. Politicians have more freedom to use financial instruments as a weapon.

Warsh, who was nominated by U.S. president Donald Trump in January to succeed Jerome Powell at the helm of the board, is expected to be confirmed by the Senate before Powell's?term ends on May 15th.

His confirmation hearing delved into his views on?Fed independence? and a controversial preference to slash the Fed's $6,7 trillion balance sheet. There was a twist to his testimony which enraged many of his future colleagues around the globe.

Since Trump returned to the White House in 2017, concern has grown throughout Europe about the willingness of the administration to weaponize the trade and military support for the purpose of extracting political and financial concessions.

Finance has traditionally linked perceived threats to Fed Independence - Powell raised the issue himself after a criminal charge was filed against him earlier in the year - to a possible revision of the Fed's Currency Swap Lines. These lines have been providing dollar liquidity to allied countries for the past two decades.

The fear is very simple. If the Trump Administration is willing to politicize transatlantic military alliances and long-standing international trade agreements, central banks around the world will need to prepare contingency plans to deal with a possible removal of Fed dollar funding lines overseas. These lines, like tariffs, could be used as bargaining chips by other G7 central bankers.

Warsh's view on Fed reform sounds more nuanced.

Many see the president's appointment of Mr. Powell, who is demanding lower rates and has publicly threatened central banks who refuse to do so, as undermining Mr. Powell's own argument that balance sheet reduction is a way to disassociate the Fed from politics.

Many overseas finance chiefs are just as concerned about the stability and security of dollar backstops after his hearing as they were prior to his nomination.

Warsh's written response to the question of Democratic Senator Elizabeth Warren, asking if the Fed can disagree with Treasury over swap lines, or act independently was cryptic.

Warsh wrote that "Fed autonomy is at its highest in the operational conduct monetary policy." "Fed officials do not have the same right to special deference, for example in matters affecting international finances. In these matters, the Fed works with the Administration and Congress."

One official overseas described this statement as "troublesome."

'TROUBLESOME'

Warsh seems to be indicating that standing facilities will be dropped in favor of Treasury sanctioned bilateral financing lines.

Washington may or may be against making liquidity backstops contingent on political approval. It would upset the assumptions of foreign central banks and financial institutions about the availability of dollars in a sudden shock, such as the one that occurred in 2008 during the banking collapse.

The dollar's dominance in global finance and trade may be the reason for this funding vulnerability. The U.S.'s unwillingness to address the issue of sudden dollar shortages may accelerate efforts to reduce reliance over time.

The monetary authorities who can't rely on emergency spigots any longer need to increase stress testing and develop alternatives.

Fed swap lines to Canada and Mexico date back to the 1990s. They were extended to G7 central banks and others around the 2008 crash. The current dollar swap lines were established in 2013, and have been adjusted to reflect the global pandemic?and regional banking squeeze that will occur by 2023.

Minutes of Fed meetings from May 2025 show that most standing lines are in place until further notice, but they appear to be reviewed annually and voted upon.

Treasury's involvement with bilateral dollar swap lines, drawn from its more limited stabilization funds, appears to have increased over the last year, particularly in Argentina, and more recently around a United Arab Emirates request.

If you want to depoliticize the central bank, then you could end up politicizing global finance and crisis management like never before.

Warsh may be able to feel the tension in his first meeting.

The opinions expressed are those of Mike Dolan a columnist at. This column is great! Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)