Scott Bessent is the U.S. Secretary of the Treasury. It is possible that President Trump might appoint him to the Federal Reserve. In any case, the Treasury works closely with the Fed as well as the President so Bessent’s opinion is worth knowing.
The Fed’s ‘Gain of Function’ Monetary Policy
The central bank put its own independence at risk by straying from its narrow statutory mandate.
By Scott Bessent, The Wall Street Journal, 9/5/2025
…
The “extraordinary” monetary-policy tools unleashed after the 2008 financial crisis have transformed the Federal Reserve’s policy regime, with unpredictable consequences.
The Fed’s new operating model is effectively a gain-of-function monetary policy experiment. Overuse of nonstandard policies, mission creep and institutional bloat threaten the central bank’s independence. The Fed must change course…
Successive interventions during and after the financial crisis of 2008 created what amounted to a de facto backstop for asset owners. This harmful cycle concentrated national wealth among those who already owned assets. Within the corporate sector, large firms thrived by locking in cheap debt, while smaller firms reliant on floating-rate loans were squeezed as rates rose. Homeowners saw their property values soar, largely insulated by fixed-rate mortgages. Meanwhile, younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation….
By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy. The central bank’s balance-sheet policies directly influence which sectors receive capital, intervening in what should be the domain of markets and elected officials. Entanglement with Treasury debt management creates the perception that monetary policy is being used to accommodate fiscal needs. Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices. Instead of accountability, presidents and Congress have expected intervention when their policies falter. This “only game in town” dynamic has created perverse incentives for irresponsibility…
Looking ahead, the Fed must scale back the distortions it causes in the economy. Unconventional policies such as quantitative easing should be used only in true emergencies, in coordination with the rest of the federal government….
To safeguard its future and the stability of the U.S. economy, the Fed must re-establish its credibility as an independent institution focused solely on its statutory mandate of maximum employment, stable prices and moderate long-term interest rates. [end quote]
This is a scathing indictment of the Fed’s use of new powers such as quantitative easing and the many special lending facilities invented during the 2008 and Covid crises.
Bessent tacitly acknowledges the fact that the Fed’s massive lending did stabilize the economy and prevented financial crises that could have caused great depressions that could have lasted years.
Bessent is on target when he talks about the danger of “entanglement” – by which he means that Congress could enact policies of large deficits with the expectation that the Fed would buy Treasury bonds in order to suppress interest rates.
Bessent says that QE should only be used during “true emergencies, in coordination with the rest of the federal government.” President Trump has made many executive orders based on so-called “emergencies” that don’t actually exist. Bessent is saying that the Fed must communicate with Treasury (executive branch) and Congress (legislative branch) to determine whether financial crisis is actually an emergency or whether it’s just a normal economic cycle in which case the Fed should not implement QE.
I agree with pretty much everything Bessent is saying. But given the predicted huge budget deficits the strict adherence to the Fed staying in its lane will inevitably lead to higher interest rates in the future.
Wendy
