(Bloomberg) -- The Federal Reserve and other major central banks need to rethink how they respond to economic downturns and financial crises to avoid being trapped into keeping money easy for the sake of profligate governments and exuberant investors.   

That’s according to a new report from a panel of experts from the Group of 30, an influential forum of current and former policymakers and academics that includes Bank of England Governor Andrew Bailey and New York Fed President John Williams.

While central bankers must be ready to do what it takes to avert a crisis, they should make clear that unconventional steps such as quantitative easing have a limited shelf life, according to the report. They also need to avoid unduly limiting their scope for future action through explicit or implicit forward guidance on interest rates.

“We do not want crisis-driven policy actions to harden into an unhelpful new normal,” former Reserve Bank of India Governor Raghuram Rajan, one of the co-chairs of the working group that put together the report, said in a statement.

The report argues that is essentially what happened coming out of the pandemic. It’s sharply critical of the Fed and other major central banks for their delayed response to the take-off in inflation, arguing that they were hemmed in by policy promises made during the contagion and were overly reliant on economic models that mistakenly predicted the price surge would be temporary.

Central banks need “to be realistic about their ability to forecast precisely macroeconomic outcomes,” working group co-chair and former Bank of Israel Governor Jacob Frenkel said. “They should avoid being hostage to specific complex models.”

In contrast to the criticism leveled at the Fed and its advanced economy counterparts, the G30 working group praised emerging market central banks for acting quickly to tighten monetary policy to combat mounting price pressures. 

“In this inflationary cycle, the failures of policy and action were not those of emerging economy central banks,” the report said.

Looking ahead, the expert panel warned of the danger of both fiscal and financial dominance of the central banks after their easy money policies encouraged big build-ups in public and private debt.

“With high public debt levels, the interaction between monetary and fiscal policy will become more fraught,” said Princeton University professor Markus Brunnermeier, project director for the group.

In a game of chicken with fiscal policymakers, central bankers need to assert their independence and not give in to warnings that higher interest rates will wreck government finances and lead to cuts in services, according to the report.

The risk of financial dominance stems from prolonged monetary largesse that has made markets overly dependent on central bank support, the group said.  That makes it harder for policymakers to tighten credit out of fears that such action will trigger a financial crisis.

The expert panel advocated that central bankers rely less on their discretion in carrying out policy and more on simple and transparent rules.

“Pursuing discretionary measures repeatedly tends to undermine the ability of central banks to act consistently in the future,” former Bundesbank president and group co-chair Axel Weber said. “Central banks should primarily focus on achieving the inflation target over the medium term.”

(Disclaimer: The Group of 30 is chaired by Mark Carney, who has been named chairman of Bloomberg Inc.’s board.)

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