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

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

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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The January 2026 US National Defense Strategy (NDS) departs significantly from those preceding it, including from Trump’s first term. Is it deliberately misleading? Or is actual policy, including war, being driven by other considerations?

Jomo Kwame Sundaram

Much like the latest National Security Strategy (NSS), released by Secretary of State and National Security Adviser Marco Rubio in December 2025, the NDS claims to be about putting ‘America First’.

Both documents promise ‘no more business as usual’. They claim to change decades of strategy, supposedly in the national interest. Unlike earlier US military blueprints, the NDS is filled with vague rhetoric and eschews interventions abroad.

But in Trump 2.0’s first year alone, the US bombed ten countries, threatening at least four more, all in the Americas. Despite scant mention in both documents, the US-Israel war on Iran resumed on 28 February!

Europe
The NDS claims the US is reducing its direct military role in Europe but still wants to be influential.

It pledges to remain central to NATO “even as we calibrate US force posture and activities in the European theater” to meet US priorities.

Nurina Malek

The NDS blows hot and cold on Europe’s aggressive support for Ukraine’s Zelensky, envisaging a reduced troop presence on NATO’s borders with Ukraine.

Many European allies complain the Trump administration has created a ‘security vacuum’ by leaving Europe to confront Russia with uncertain US support.

They also complain about Secretary Pete Hegseth’s insistence on “credible options to guarantee US military and commercial access to key terrain”. The NDS insists on more than access to Greenland and the Panama Canal.

Issued days after Trump claimed he had a “framework of a future deal” on Arctic security with NATO chief Mark Rutte, he insisted it ensured the US “total access” to Greenland, long a territory of NATO ally, Denmark.

However, Danish officials insisted formal negotiations had not yet begun. Trump also threatened European nations opposing his Greenland plan with tariffs.

Western Hemisphere
The NDS supports the NSS and Trump’s ‘Donroe doctrine’ focus on the Western Hemisphere, envisaging the Americas as the US backyard.

In his January Davos speech, Canadian Prime Minister Mark Carney noted that recent US actions are disrupting established international norms.

The NDS was issued three days later, after a week of tensions between the White House and its Western allies. Cooperation with the Americas, including Canada, is conditional, to “ensure that they respect and do their part to defend our shared interests”.

It warns the US will “actively and fearlessly defend America’s interests throughout the Western Hemisphere. And where they do not, we will stand ready to take focused, decisive action that concretely advances US interests.”

Trump had declared the US should retake Panama and its Canal, accusing the government of ceding control to China. Later, however, Trump was more ambiguous about ‘taking back’ both the country and the canal.

Many also doubt Trump’s intentions in kidnapping Venezuelan President Nicolás Maduro and his wife, ostensibly for trial on drug charges in the US.

Asia-Pacific
The previous NDS, issued in 2022 under then-President Joe Biden, had deemed China the US’s principal threat. Biden also embraced Trump 1.0’s Indo-Pacific alliance to encircle China.

In contrast, the new NDS describes China as an established power in the Indo-Pacific region that only needs to be discouraged from dominating the US and its allies.

The goal “is not to dominate China; nor is it to strangle or humiliate them… This does not require regime change or some other existential struggle…President Trump seeks a stable peace, fair trade, and respectful relations with China”.

The NDS even proposes “a wider range of military-to-military communications” with Chinese counterparts! The U-turn followed the administration’s retreat from its threatened tit-for-tat tariff escalation after China’s successful retaliation.

Biden’s 2022 NDS promised the US would “support Taiwan’s asymmetric self-defense”. The new NDS offers no such assurances to the self-governing island province of China, which Beijing warns it will take by force if necessary.

The NDS also calls for “a sharp shift – in approach, focus, and tone”, insisting US allies must take more responsibility for countering adversaries such as China, Russia and North Korea.

It insists, “South Korea is capable of taking primary responsibility for deterring North Korea with critical but more limited US support”.

Cutting costs of empire
Like Trump, the new NDS wants allies to pay much more for US ‘protection’.

It echoes his frequent criticisms of allies for taking advantage of previous administrations to subsidise their defence and being ungrateful for US protection.

But the terms of such subordination remain ambiguous and arbitrary, even extortionate and corrupt. Gulf monarchies may now regret their generous donations to the president, apparently to little avail so far.

Trump’s treatment of allies, the Netanyahu-led war on Iran, and continuing US-led efforts to ‘contain’ China suggest both documents offer poor guidance to knowing and understanding, let alone anticipating, US policies abroad.

Nurina Malek is an economics graduate of the University of Wisconsin-Madison, currently working on policy research at the Khazanah Research Institute.

IPS UN Bureau

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