The Federal Reserve had a challenging close to a year in which it was often and regularly celebrated for its crisis response. Yet it found itself exactly where it desires to be the least: the middle of a heated and extremely consequential political fight. Certainly, the Fed would have preferred to be encouraging the adoption of more fiscal support instead of being the final reason holding it up.

The dispute between the US Treasury and the Fed over the year-end termination of the Fed’s emergency lending facilities, in which the Fed wrote a rare rebuke of Treasury Secretary Steve Mnuchin’s decision evolved when Senator Pat Toomey (R-PA) introduced language forbidding the Fed to restart any lending programs that were similar to those in the CARES Act. According to the potential future Senate Banking Chairman, (if any of the Georgia Senate seats go to the GOP) he thought the Democrats would use the emergency powers to turn the Fed ‘from a lender of last resort to a lender of first resort.’

Democrats accused the GOP of trying to neuter its economic toolkit, and national preparedness, for political purposes. Aside from the partisan squabbling, the episode undoubtedly has highlighted what will likely be a key issue around the Fed in the coming months and years; just how e...

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