This prompted me to refresh my understanding of fiscal dominance.

— Fiscal dominance occurs when central banks use their monetary powers to support the prices of government securities and to peg interest rates at low levels to reduce the costs of servicing sovereign debt. Although the Fed may not call its unconventional monetary policies “fiscal dominance,” there is no doubt that the distance between fiscal and monetary policy has narrowed since the 2007–2008 financial crisis, and especially since the pandemic. — While Fed Governor Waller provides a strong case for Fed independence and for separating fiscal from monetary policy, his complacency about the risk of fiscal dominance ignores historical episodes of capturing the Fed for fiscal purposes during peacetime. In particular, since 2007 the Fed has moved closer to fiscal dominance by its intrusion into the fiscal space, using Section 13(3) emergency credit allocation and lending (e.g., housing finance, corporate debt, municipal bonds, and Main Street lending), and monetizing government debt. Moreover, with rising levels of debt to GDP, there is a plausible case that the Fed may once again turn to yield‐​curve control—that is, peg interest rates on U.S. debt at politically favored rates to keep financing costs under control.

Ignoring those threats allows the Fed to conduct fiscal and credit policy under the pretense of monetary policy. This is a masquerade that eventually will be unmasked. The Fed has already crossed the bright line between fiscal and monetary policy. It’s time, says Plosser, “for the Fed to take a step back and reconsider its commitment to an ‘ample reserves’ operating system and to take more seriously the current threats and how its own actions are undermining its credibility and the case for independence.” Thinking about the risks and implications of fiscal dominance is a worthy endeavor, even if there is no serious threat at the moment.

Source: A 2021 Cato article: