It amplifies the temptation to overspend in turbulent times.

T he Federal Reserve has become the “only game in town” for America’s economic problems. That phrase once signaled admiration. Today it’s an indictment. A growing concern has taken hold in Washington that innovations in monetary policy may be undermining fiscal discipline by creating the expectation that the Fed will always monetize deficits. Treasury Secretary Scott Bessent has called these innovations “gain of function monetary policy.” If true, this threatens the central-bank independence that has anchored American economic stability for decades.

The worry is understandable. The main innovation that Bessent is talking about, quantitative easing (QE), was born from crisis. In 2008, with credit markets frozen, the Fed purchased Treasury securities and mortgage-backed securities to provide emergency liquidity. It was meant to be temporary and limited. It was neither.

Fed holdings of Treasuries exploded from less than $800 billion in 2007 to more than $5 trillion by 2022. At its peak, the Fed was absorbing a quarter of all publicly held U.S. debt. Critics suggest that this has sent a dangerous signal to Congress to borrow without limit, and the Fed will provide cover.

My research reveals a more nuanced reality. Deficits typically widen before QE interventions, not because of them. The simple narrative that QE causes fiscal profligacy does not hold. The data show that QE is largely reactive to fiscal shocks rather than their cause.

But this does not mean the threat is imaginary. The truth is subtler and more hazardous than the caricature suggests. During economic stress, when the Fed already holds massive quantities of Treasuries or actively purchases new debt, fiscal responses grow larger than they otherwise would.

QE may not cause fiscal excess during relatively stable periods, but it amplifies the temptation to overspend in turbulent ones. The Covid-19 pandemic proved this. Massive stimulus packages rode on Fed balance-sheet expansion and delivered the highest, most persistent inflation in four decades.

The real danger is that the Fed’s gain-of-function monetary policy has muted the market signals that discipline governments. Normally, excessive borrowing raises interest rates and crowds out private investment. With the Fed in the market, those signals blur. The Treasury issues debt at artificially low costs. Without these signals, Congress believes that the nation has genuine fiscal capacity. The line between monetary support and monetary financing vanishes.

The consequences extend beyond economics. Central-bank independence undergirds sustainable growth. When fiscal policymakers expect Fed accommodation, monetary policy becomes subordinate to politics. This is fiscal dominance in practice. Once markets believe that the Fed has lost independence, its credibility on price stability collapses. That credibility cannot be easily rebuilt.

Three reforms are necessary to maintain independence between the Fed and the Congress. First, Congress must adopt medium-term targets that recognize the limits of safe borrowing. Targets can restore the guardrails that market signals may no longer provide. Second, the Fed must reestablish that QE is temporary, contingent, and exceptional. Every asset-purchase program should include a clear unwinding plan. Third, the Treasury should stress-test debt issuance under scenarios where the Fed is not a willing buyer and report results to Congress. This would expose the risks of assuming central-bank accommodation.

The relationship between monetary and fiscal policy is more complex than critics claim, but the threat to Fed independence is real. Unless Congress relearns how to operate without assuming Fed support, the United States risks a regime where deficits dictate monetary policy rather than the reverse. That would reverse the principles that have sustained economic stability for generations. The Fed must return to its proper role, and Congress must face the true cost of its choices.