President Donald Trump’s proposal to give Americans $5,000 payments is raising questions about how the plan could affect U.S. monetary policy, particularly as Federal Reserve Chair Kevin Warsh pushes for greater attention to the relationship between money supply and inflation.
Trump has proposed the payments as a dividend funded by tariff revenues, arguing that the United States is collecting enough money to support the scheme. Treasury Secretary Scott Bessent has also said the administration could work with Congress to advance the proposal if legislative approval is required.
The plan faces significant hurdles. The proposed payments to roughly 250 million Americans would cost at least $1.2 trillion, while tariff revenues are not currently projected to provide enough money to cover the full amount. Financing the payments through additional government borrowing could also add pressure to already elevated federal debt and borrowing costs.
Congressional approval is another uncertainty. Even if Republicans retain control of Congress after the November midterm elections, the proposal could face opposition over its fiscal cost and potential inflationary effects.
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Why money supply matters
The proposal is particularly relevant to Warsh because of his long standing views on the relationship between money supply and inflation.
Before becoming Fed chair, Warsh criticized the central bank for responding too slowly to the expansion of the money supply during the COVID 19 pandemic. During the pandemic, Congress approved three rounds of direct payments to households, worth up to $1,200, $600 and $1,400 per eligible adult.
Those payments formed part of broader economic relief packages. At the same time, annual growth in M2, a broad measure of money and bank deposits, reached a record 27% in early 2021. Inflation subsequently accelerated, although the relationship between fiscal transfers, money growth and inflation remains a subject of economic debate.
Warsh has argued that greater attention to monetary aggregates could have helped policymakers identify emerging inflationary pressures earlier. In his recent Jackson Hole speech, he again called for money supply to play a larger role in the Fed’s policy framework.
A new round of direct payments would therefore present a very different policy environment from one in which the central bank is trying to contain inflation.
The Fed’s dilemma
The proposed payments are not expected to directly influence the Fed’s immediate rate decision unless they become sufficiently concrete to affect economic forecasts and financial conditions. Monetary policymakers generally focus on incoming economic data and the outlook rather than political proposals that have not been implemented.
If the payments were eventually approved and distributed, however, they could increase household spending and aggregate demand. Their effect would depend on how the payments were financed, how much recipients spent rather than saved, and the broader condition of the economy.
For Warsh, the issue could also reinforce the tension between fiscal policy and monetary policy. Trump has repeatedly advocated lower interest rates, while Warsh has emphasized the need for the Fed to remain focused on inflation and monetary conditions.
The disagreement could become more consequential if fiscal stimulus begins adding demand to an economy in which inflation remains above the Federal Reserve’s target.
What’s next
The immediate question is whether Trump’s proposal can move beyond political rhetoric and secure congressional approval and a viable funding mechanism.
If it does, the Fed would have to assess its economic effects alongside employment, inflation, consumer spending and other indicators. For Warsh, a large fiscal transfer could provide another test of his argument that changes in the money supply deserve greater weight in monetary policymaking.
The proposal therefore matters even before any checks are issued. It highlights the broader challenge facing the Fed: maintaining control over monetary policy while the White House pursues a significantly more expansionary fiscal agenda.
With information from Reuters.
