>The Federal Reserve has endured many insults from the Trump administration, but a new line of attack opened up last month when the Treasury secretary himself accused it of presiding over the monetary equivalent of a lab-created virus outbreak. Writing in The International Economy magazine, Scott Bessent compared the “extraordinary” monetary policy tools used by the Fed after the financial crisis to scientific research that has gone awry. “[Lab experiments] can wreak havoc in the real world,” he said. “Once released, they cannot easily be put back into the containment zone.” In Bessent’s argument, it was unacceptable “mission creep” for the Fed to use massive purchases of assets to stimulate growth, the policy known as quantitative easing. Instead, he wrote, the central bank needs to return to a far simpler toolkit.
>His complaints about distortions stemming from large-scale asset purchases mirror warnings from Kevin Warsh, a former Fed board member and one of the leading candidates for the next chair, who argued in April that bond-buying had become a “near-permanent feature of central bank policy and power” and was fostering irresponsible fiscal policy. QE has been controversial since the start — from when central banks first started buying assets in the aftermath of the global financial crisis all through the next decade and beyond as the policy continued, with occasional pauses, until 2022. But the new attack on QE, including from the US Treasury department, comes at a particularly acute time for central banks Since 2022, the Fed and several other central banks have been unwinding some of those purchases by selling them or letting them expire — a process known as quantitative tightening.
>This was always going to be a fraught exercise, give the potential for losses in some countries which have to be picked up by taxpayers, or for the balance sheet rundown to have an impact on interest rates. But now central banks find themselves shrinking their holdings in the face of fierce criticism of their conduct from rightwing populist politicians, some of whom openly want to exert more political control over monetary policy decisions. In the US, the independence of the Fed is being aggressively challenged by the administration. President Donald Trump is trying to fire Lisa Cook, one of the Fed board members, and has criticised its chair Jay Powell, whose term ends next year, for being too slow to reduce interest rates.
>The fiscal costs stemming from the effort to unwind those policies are proving particularly explosive in the UK — where the upstart Reform party is openly attacking the Bank of England over losses on its bond-buying program. “The unravelling of central bank entanglements with government debt was going to be complicated in the best of circumstances,” says Eswar Prasad, an economist at Cornell University. “These are clearly not the best of circumstances economically or politically.” Some of the complaints about QE have broad resonance among economists. There are legitimate arguments that the policy was taken too far in the years following the crisis — and particularly in the wake of the pandemic. To critics, the massive balance sheets held by central banks have inflated asset price bubbles, fostered inequality, led to misallocation of capital, and masked unsustainable public finances.
>Some economists see a risk that political antipathy could constrain central banks when the next economic crunch strikes, leaving policymakers with fewer options. At the very least, say some, central banks need to come up with a better set of guidelines to ensure they only ever use QE in the direst of emergencies. Vincent Reinhart, the chief economist at BNY Investments, co-authored two research papers on QE with former Fed chair Ben Bernanke. “We did not include a section on how to get out of the policy, or the risks stemming from it,” he says. “That was a mistake — it was a lot stickier than I thought going in and has opened up a range of complications and potential political influences on monetary policy.”
>Sushil Wadhwani, a former Bank of England policymaker, says he was supportive of initial rounds of QE, which in the UK began in 2009, but that the tool was used to excess during the aftermath of the pandemic, with costly results for the public finances as it is unwound. “They overstayed their welcome,” he says. “It is sad because it has poisoned the political economy against using this weapon.” The use of central bank balance sheets in financial crises is far from a novelty — it has a history dating back hundreds of years.
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>The Federal Reserve has endured many insults from the Trump administration, but a new line of attack opened up last month when the Treasury secretary himself accused it of presiding over the monetary equivalent of a lab-created virus outbreak. Writing in The International Economy magazine, Scott Bessent compared the “extraordinary” monetary policy tools used by the Fed after the financial crisis to scientific research that has gone awry. “[Lab experiments] can wreak havoc in the real world,” he said. “Once released, they cannot easily be put back into the containment zone.” In Bessent’s argument, it was unacceptable “mission creep” for the Fed to use massive purchases of assets to stimulate growth, the policy known as quantitative easing. Instead, he wrote, the central bank needs to return to a far simpler toolkit.
>His complaints about distortions stemming from large-scale asset purchases mirror warnings from Kevin Warsh, a former Fed board member and one of the leading candidates for the next chair, who argued in April that bond-buying had become a “near-permanent feature of central bank policy and power” and was fostering irresponsible fiscal policy. QE has been controversial since the start — from when central banks first started buying assets in the aftermath of the global financial crisis all through the next decade and beyond as the policy continued, with occasional pauses, until 2022. But the new attack on QE, including from the US Treasury department, comes at a particularly acute time for central banks Since 2022, the Fed and several other central banks have been unwinding some of those purchases by selling them or letting them expire — a process known as quantitative tightening.
>This was always going to be a fraught exercise, give the potential for losses in some countries which have to be picked up by taxpayers, or for the balance sheet rundown to have an impact on interest rates. But now central banks find themselves shrinking their holdings in the face of fierce criticism of their conduct from rightwing populist politicians, some of whom openly want to exert more political control over monetary policy decisions. In the US, the independence of the Fed is being aggressively challenged by the administration. President Donald Trump is trying to fire Lisa Cook, one of the Fed board members, and has criticised its chair Jay Powell, whose term ends next year, for being too slow to reduce interest rates.
>The fiscal costs stemming from the effort to unwind those policies are proving particularly explosive in the UK — where the upstart Reform party is openly attacking the Bank of England over losses on its bond-buying program. “The unravelling of central bank entanglements with government debt was going to be complicated in the best of circumstances,” says Eswar Prasad, an economist at Cornell University. “These are clearly not the best of circumstances economically or politically.” Some of the complaints about QE have broad resonance among economists. There are legitimate arguments that the policy was taken too far in the years following the crisis — and particularly in the wake of the pandemic. To critics, the massive balance sheets held by central banks have inflated asset price bubbles, fostered inequality, led to misallocation of capital, and masked unsustainable public finances.
>Some economists see a risk that political antipathy could constrain central banks when the next economic crunch strikes, leaving policymakers with fewer options. At the very least, say some, central banks need to come up with a better set of guidelines to ensure they only ever use QE in the direst of emergencies. Vincent Reinhart, the chief economist at BNY Investments, co-authored two research papers on QE with former Fed chair Ben Bernanke. “We did not include a section on how to get out of the policy, or the risks stemming from it,” he says. “That was a mistake — it was a lot stickier than I thought going in and has opened up a range of complications and potential political influences on monetary policy.”
>Sushil Wadhwani, a former Bank of England policymaker, says he was supportive of initial rounds of QE, which in the UK began in 2009, but that the tool was used to excess during the aftermath of the pandemic, with costly results for the public finances as it is unwound. “They overstayed their welcome,” he says. “It is sad because it has poisoned the political economy against using this weapon.” The use of central bank balance sheets in financial crises is far from a novelty — it has a history dating back hundreds of years.