It's hard to resist the realization that the Federal Reserve is increasingly managing crises it has unleashed. The central bankers don't even cut a bad figure in crisis management. Fed Chairman Jerome Powell comes across as honest, pragmatic, hands-on and at the same time willing to admit mistakes.
And mistakes have truly been made. Far too late, the Federal Reserve had realized that inflation could gallop away after huge pandemic aid programs. Despite draconian interest rate hikes for more than a year, inflation has not yet been slowed down.
However, the sins began even before the 2008 financial crisis, when low interest rates helped inflate assets to such an extent that they crashed. Seven years later, key interest rates were at zero, only to climb briefly to a historically low 2.5 percent. After that, they fell back to zero percent to help the economy in the pandemic.
With this long lax policy, the Fed has accustomed economic actors to the fact that financing de facto costs nothing. Financial institutions have become accustomed to neglecting interest rate risks, the danger of which is usually instilled in bankers in the early years of their apprenticeship, provided they are properly trained.
Powell's warning to politicians
The extraordinarily expansionary government spending under Donald Trump and Joe Biden can also only be explained by the monetary policy-driven view that credit is not a problem when interest rates are close to zero. Now the two political parties, which are in no way inferior to each other in terms of debt, are arguing about how to raise the legal debt ceiling. If the politicians cannot agree, then the Ministry of Finance would have to stop the payments. A severe global financial crisis would then be possible.
Fed Chairman Powell warned policymakers not to be under the illusion that the Federal Reserve can protect the American economy in this scenario. That would indeed be an excessive burden on crisis management. It would have been better if the Fed had made better policy earlier.