A new Fed-Treasury Accord? | John H. Cochrane | Feb 17, 2026 | The Grumpy Economist

"In its various Quantitative Easing programs, the Fed bought long-term debt and gave out overnight debt (interest paying reserves) in return. That undoes some of the interest rate protection the Treasury bought.

The wife went to the bank, and got the 30 year fixed. The husband went back to the bank and said no, no, swap that back to half floating. Interest rates went up, the wife thought “how wise I was.” The husband must admit sheepishly what happened and how their mortgage payments are going up. We can pretend only he lost money, but in the end they’re married.

Likewise, the Fed and Treasury pretend to be separate but in the end, the Fed’s losses end up with the Treasury, and thus the taxpayer. Right now the US is paying a trillion dollars a year of interest costs on the debt. That’s not all the Fed’s fault. I’ve been arguing for a decade that the Treasury should have borrowed much longer to buy just this protection, and even issue perpetual debt. But the Fed did make that substantially worse by undoing a lot of the Treasury’s long term debt issues."