It may seem astonishing that a trillion or so in fiscal stimulus along with the entire U.S. Government’s appropriation hang in the balance of what Federal Reserve emergency facilities are supposed to do.  But so it was throughout a week of hard-fought negotiations.  And so it will be in the next Congress because the Fed’s unflinching willingness to provide fiscal-equivalent support has changed both the central bank’s function and political standing.  Now, the question isn’t if the Fed should step in to rescue markets and business sectors.  Instead, it’s whom to save and by how much.

The current legislative battle is raging over the narrow question of whether Treasury Secretary Mnuchin reads the CARES Act right and thus must pull Treasury backstops from several key facilities by December 31.  Mr. Mnuchin tried a plea that the private sector could take over, but he didn’t deny the need to enlist the Fed to rescue everyone from junk ETFs to New York’s subway.  In March, Mr. Mnuchin’s defense of Fed facilities was totally pragmatic – using the central bank to lever up taxpayer funds masked the cost of CARES Act subsidies.  Now, the Treasury Secretary is equally pragmatic – his job is done and he wants the next Administration to go to all the trouble he had to in order to fund the next round of taxpayer backstops – or, dare one say it, bailouts.  Democrats are of course also pragmatists.  Taken with the political efficiency of having the Fed spend money instead of them, Democrats only differ with Republicans over who should benefit from Fed largesse, not whether there should be Fed largesse.

The Fed’s focus isn’t pragmatic – there’s little in all these market interventions for it but more political risk.  The Fed has instead acted because its monetary-policy toolkit is empty, its efforts to stabilize financial markets have failed, and it knows not what else now to do.

Once, the Fed saw its role as “taking the punch bowl away” when economies got too hot.  Now, it’s become the punch bowl livening up any party that can’t get going on its own.  Any central bank providing so much refreshment is of course a central bank any politician will demand cater his or her own party, not the one the central bank might think best behooves it.  No wonder the entire fiscal-stimulus bill in the midst of a pandemic has proven so vital – Members on both sides know that, if they determine whom the Fed supports next year, they set fiscal policy without the bother of having to fund it all by themselves.  The Fed will need to proceed very, very carefully and the economy will need to recover quickly along with financial stability if the Fed is to avoid yet another new role:  punching bag.