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– The Federal Reserve Bank’s turn to ‘reserve management’ exposes the limited policy options still available as the US seeks to protect itself against international stagflation stemming from President Trump’s policies.
Jomo Kwame Sundaram
Ex-Duquesne Capital chairman Stanley Druckenmiller, former George Soros ‘clone’ and right-hand man, has suggested that Fed adoption of reserve management implies it is running out of policy options.
Reserve management
Successive US administrations have long refused to address the roots of the worsening fiscal and debt problems.
As the US Treasury borrows ever more to continue funding federal government spending with less tax revenue, the accumulated public debt of $39 trillion now costs over a trillion dollars a year to service, even more than 2025 defence spending!
Total Fed losses since 2022 exceed $245 billion! But how does a central bank, that literally creates its own money, lose money?
The losses are blamed on the Fed paying banks over 4% interest on reserves after 2008. However, most Treasury bonds the Fed bought to fund the COVID crisis response yield only 1–2%!
This massive ‘negative carry trade’ is booked as a ‘deferred asset’. Such creative accounting implies the US is technically insolvent. But this is not a problem as long as Wall Street shapes its own narrative.
Nurina Malek
In December 2025, Fed chair Jerome Powell announced that the Fed would purchase $40 billion in Treasury bills each month. This new mode of money creation finances government debt.
After over a decade of ‘quantitative easing’ (QE), which created money on a large scale, the Fed claimed it was reducing its balance sheet from 2022 to 2025 to curb inflation.
Risk diversification
Finance ministries and central banks worldwide increasingly worry about their vulnerability.
The US decision to freeze about $300 billion of Russian assets held in Western financial institutions is supported by its Western allies. Such actions have triggered broader concerns.
Threatened by the prospect of a softening bond market, the Fed turn to reserve management, which implies it has exhausted other options, including printing money.
Increasingly weaponised in recent years, the dollar is no longer trusted as a neutral reserve asset. Hence, central banks have been diversifying their heavily dollar-denominated reserve assets to reduce vulnerability.
Physical gold has been quietly acquired to change reserve portfolios. Over the past three years, non-US central banks have bought over 1,000 tons of gold annually.
Horns of dilemma
New Fed Chair Kevin Warsh has announced that reducing interest rates and shrinking the Fed’s balance sheet are his policy priorities. Both seem responsible and sensible.
Lowering rates benefits borrowers. But a smaller balance sheet implies less market intervention, requiring greater fiscal discipline and monetary credibility, both of which are desired by markets.
But Warsh’s two goals cannot be realised together in today’s US economy. Over $10 trillion in bonds are maturing and need refinancing over the coming year, as the Treasury borrows ever more to finance its faster-growing fiscal deficit.
The Fed balance sheet cannot be reduced while keeping rates low. The new Fed Chair will also have to choose between printing money and letting the bond market collapse. All his predecessors have chosen to print money.
In 2012, Jerome Powell was sceptical of QE, arguing it would never be enough. But by 2020, Fed chair Powell printed more dollars than ever before.
The Fed has long been expected to buy up Treasury bonds that private interests did not purchase. Increasing the money supply has kept the banking system liquid and depreciated the dollar, as desired by Trump 2.0.
As private investors and foreign central banks lose interest in US Treasury bonds, demand is at its weakest in decades.
Who will buy new US debt if the Fed does not buy Treasury bonds while rates remain low? Outgoing Fed chair Powell came to the rescue.
As ‘reserve management’ requires less market demand, he has given the dollar system an unexpected new lease of life without lowering interest rates, as Trump demanded.
However, the policy change will do little to reverse contractionary and inflationary pressures on the world economy, worsened by Trump’s various policies.
Oil accelerant
The Hormuz oil shock could accelerate this otherwise gradual transition. The slow energy transition away from fossil fuels has increased vulnerability.
In the last half-century, oil price hikes have raised energy costs, exacerbating inflation worldwide. In 1973, the OPEC embargo quadrupled petroleum prices overnight.
Over the following year, the gold price almost doubled. The 1979 Iranian revolution more than doubled crude oil prices, which in turn pushed gold prices even higher.
The conventional central bank response of raising rates to fight inflation could worsen stagflation, as inflation rises while economic growth slows.
Raising interest rates may check some sources of inflation, while increasing borrowing costs, squeezing investment and consumption, and hiking the costs of Treasury debt.
Interest payments on accumulated federal debt will exceed a trillion in 2026. As old debt issued during QE is refinanced at higher rates, fiscal and debt problems will accelerate.
Therefore, the Fed’s turn to reserve management is not merely a minor technical change in balance-sheet bookkeeping. It is trying to address worsening public finances as policy options run out.
IPS UN Bureau
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