Central Banks Shield Governments from Debt Risks Amid Higher Financing Costs

Central banks are implementing policies that benefit governments and financial markets while leaving households and businesses to bear the brunt of higher financing costs.

The Federal Reserve's ample-reserves framework and the European Central Bank's Transmission Protection Instrument have created a system where private borrowers face expensive credit, but governments enjoy protection from sovereign debt risks.

This unequal treatment can lead policymakers to mistake resilient financial markets for a healthy economy, ignoring the struggles of households and productive companies.

As Roberto Perli, manager of the Federal Reserve's System Open Market Account, noted, maintaining ample reserves is compatible with restrictive interest rates, but it does not alleviate the burden on private borrowers.