Federal Reserve Chairman Jerome Powell speaks at a news conference following the Federal Open Market Committee meetings in Washington, U.S., March 21, 2018. Aaron P. Bernstein | Reuters

Former Federal Reserve Chairman Ben Bernanke used extraordinary tools to fight the financial crisis, and a decade later the Fed is having a hard time putting them away. When Lehman Brothers failed 10 years ago, the Fed and other government agencies took all types of actions to head off a collapse of the financial system and to bolster the banking sector. Fed officials are still unwinding some of those moves, and chances are the hangover from those policies will be with them well into the future. "It required a lot of creativity to come up with solutions that would stabilize the market and exist in the limit of the law," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch. "The market is still dealing with a lot of these legacy issues today and it's taking a long time to undo some of the actions that were put in place during the financial crisis to ensure that a financial crisis like we had a decade ago doesn't happen again." The Bernanke Fed used untested measures, such as pumping liquidity into the banking system, slashing interest rates to zero and buying Treasury and mortgage securities in a "quantitative easing" program that ballooned its balance sheet to a high of $4.5 trillion. In a post-crisis regulatory response, banks were reigned in, subjected to higher capital requirements and mandatory stress tests. The Fed's balance sheet Source: St. Louis Fed Bernanke's successor, former Fed Chair Janet Yellen, made the first moves to "normalize" interest rates after the crisis. And now Fed Chairman Jerome Powell has been raising rates and chiseling away at the balance sheet with a program to "taper" back purchases of securities. The Fed had previously repurchased securities to replace all that were maturing, and now it only replaces some of them as they run off, shrinking its balance sheet as a result. For consumers, the Fed's policy reversal means mortgage rates are rising, and other consumer loans are also more expensive. A 30-year fixed rate mortgage, now at about 4.6 percent, is well above the rate a year ago when it was less than 4 percent. Interest rate incentives, such as zero percent financing on autos, are also going away. In the Treasury market, the 2-year note yield, which closely tracks Fed policy, was at 2.736 percent, the highest level since the summer before Lehman failed.

Ben Bernanke and Janet Yellen during a Fed meeting in December 2013. Andrew Harrer | Bloomberg | Getty Images

The slow pace of reversing these policies is part of an evolution of the major central banks, which have changed with their environment. The Fed's financial crisis policies have become part of its took kit. "Central banks, led by the Fed saved the day, and really sort of prevented a repeat of the Great Depression, which is where we were," said Elga Bartsch, who heads economic and markets research at BlackRock Invesment Institute. "They clearly averted that. That doesn't mean we've completely sprung back to health." Financial conditions are still supporting growth and financial markets, but "in the coming quarters the Federal Reserve will likely push interest rates closer to a neutral level," she said. Neutral is the level that neither stimulates or slows the economy, but it's precise number is a matter of debate.

Can Fed really do it this time?

Since the Federal Reserve began raising interest rates in December 2015, markets have been skeptical the Fed will actually follow through with its forecasts, since the Fed has backed away at signs of trouble for the economy and markets. Futures markets still project low odds for more than one rate hike on the fed funds rate, while the Fed forecasts three. Reversing course from quantitative easing might create issues no one has foreseen. "We just don't know over time if there's something that could tip the apple cart," said Diane Swonk, chief economist at Grant Thornton. "There's no way to predict or model what might hit the Fed….they're trying to make sure they communicate well what they're trying to do so nothing goes awry. We're in uncharted waters." The Fed is expected to raise its fed funds target rate in late September and again in December. That would put it at 2.25 to 2.5 percent by the end of the year. But economists say the Fed may not get rates anywhere near what used to be viewed as a normal neutral rate before it stops hiking. Swonk said the Fed could slow its tapering or even start buying debt again if it were to face a new crisis, but the effect may be minimal. The Fed could also drive rates back down to zero. "There's no easy answer on this one. There have been things put in the financial system to guard against the problems we've had, but that means we could get a crisis somewhere else that could hit in a different way. It's not hard to come up with a list of what could go wrong." Fed officials, however, have been eager to raise rates, to both give themselves a cushion for any new crisis and to prevent unintended consequences of bubbles in the economy. The Fed has raised rates seven times since 2015 in an effort to get back to a more normal level.

'Yield curve' signaling trouble?

Joseph LaVorgna, Natixis' chief economist for the Americas, is in the camp that believes the Fed could cause trouble for the economy if it hikes as much as it forecasts. He points to the signal coming from the difference between the short-term and longer term rates, which is narrowing, or flattening in bond market parlance. That is viewed as a possible warning about future economic growth, and Fed rate hiking could speed the flattening process. If the so-called yield curve actually inverts, where the short end yield on a , for instance, rises above the longer term 10-year note yield, that would be taken as a strong indication of a coming recession. "The market is very sophisticated. It sniffs these things out before the Fed," he said. "Certainly, whenever the next equity correction comes, it could be large enough to thwart the Fed." Some of the skepticism about future rate hikes has been because of low inflation, which has recently picked up and now meets the Fed's 2 percent target. Another reason is that there could be some event that affects the economy and slows the Fed, like a broader trade conflict or the emerging markets selloff, which some blame on the the central bank. "The Fed is contributing to higher interest rates, more dollar strength. That complicates things for emerging markets, so the Fed is certainly contributing to some of the stress we're seeing in emerging markets," said Bank of America's Cabana. But that's only part of the story and if the Fed was the sole force behind the weakness in the emerging world, financial conditions would be tighter, he said. BlackRock's Bartsch said the Fed may be having some influence but emerging markets are having their own issues. "They are first and foremost idiosyncratic stories." Countries that have seen their currencies particularly hard hit, like Argentina and Turkey, have their own specific problems with inflation and high borrowing costs. Separately, Brazil, which also has been hit, is more at risk because of political uncertainty ahead of its upcoming election. If the problem were the Fed, "you would expect the impact to be much more widespread and not just limited to emerging markets but also the credit complex in the U.S. and other risk assets," Bartsch said.

Scaling back