I don't think the power of the system is the problem. The problem, and I'm not even sure that is a great word, is that the expectations of gamers have changed such that developers feel the need to improve with every release. And the improvements have to be significant, and easily noticeable. Several generations ago, when I was gaming in the 80s and '90s, you might see multiple releases of a franchise each console generation that were really just more of the same content. They weren't better than their predecessor. They were just more. And that doesn't fly today. Nowadays we expect entirely new game worlds, and we expect more content, better graphics, etc.

The industry has become one where there's a never-ending spiral of more, more, more. Gamers demand more, so developers have to spend more, so the games have to sell more, and the publishers need more revenue streams, and the need to sell more and to develop further revenue streams means they need a larger team to make and maintain the games, and that further increases the need for more sales and more revenue streams. And then we hear about the huge money that the games are bringing in, so gamers expect more and bigger stuff from the next entry. It also increases the risk for the publishers. If they have to spend $50 million to develop a game, they have to be pretty damn sure that that game is going to sell well. Even these big companies generally cannot afford very many misses at those budget levels. So, the cycle continues.

This is mostly just a problem for AAA games though. I actually think that what we currently call indie games are in their healthiest state ever. There was no possibility for three people in three basements in three different places to put together a video game and get that game in front of millions of people on the Xbox or PlayStation stores a few generations ago. This is a relatively new opportunity that the market has opened up, probably largely to fill the void left by the massive budgets and long lead times in the AAA space. The AAA market just cannot take the risks that are possible in the indie scene. The AAA market cannot reasonably provide a continuous stream of new games. So, that void is filled by others.

There are far, far more video games being developed now than there were a few generations ago. Many of those games are shovelware crap, but that was also true in generations past, when the big name publishers were also responsible for the lower budget games (roughly equivalent to current Indies). What we have now is equivalent to what's seen in most mature industries. There are some large, entrenched players that are risk averse, so they concentrate on the established, big name products (your GTAs, CoDs, FIFAa and the like) while upstart groups (independent devs mostly, in this case) are the ones innovating. And, I don't see that as a problem.

Anyway, I think this is just a reality of the maturation of the business of gaming. It isn't due to hardware becoming more powerful. It's due to the business becoming so huge that only megacorps can play at the top levels. And, like it or not, this is just a reality of economics.

GTA VI hasn't released yet on account of hardware getting too powerful. It's taking forever because Rockstar has been content to milk GTA Online for a decade now.
I know Rockstar also had Red Dead Redemption 2 released in 2018, but GTA VI would've already been released by now if GTA V wasn't such a cash cow.
Skyrim has been milked extensively, and Elder Scrolls Online is a thing. Those have made Elder Scrolls VI take forever, not powerful hardware.
Atlus has been content to milk Persona 5 and other Persona games (including a remake of 3) instead of giving us Persona 6. Again, hardware is not the issue.
Keep in mind that Super Mario 64 and Super Mario Sunshine had 6 years apart, so I don't see how no signs of a new 3D Mario game after 6 years is particularly troubling. We're almost surely getting it in 2024 or 2025.
It's the ambition and vision of the devs that often cause the problems, not the power of the hardware.

My Xbox Series X is already too powerful. I'm not able to read the little information clips between load screens in Diablo IV because it loads too fast.

Covid certainly didn't help development of games the past few years. Graphically speaking games don't look substantially better on current consoles compared to the Pro and One X. Open world games are getting bigger and bigger, we don't really need hundreds of thousands lines of dialog in games, and as many side quests that get tacked on to pad them out. Sports games and COD still come out like clockwork every year.

The hardware is not becoming too powerful, there's no such thing as "too powerful". The devs are forgetting to optimize, and more and more we're seeing games that could run with half the specs struggle with the latest hardware. Plus, more graphical effects are eating away processing power at a frightening rate.

Weird take

No, hardware is not getting too powerful

It's software that is getting too big and complex to develop

Less about hardware and more about publishers trying to do too many big projects rather than do a few smaller projects. Also managing studios has basically vanished on a personal project level. Just quotas and deadlines no matter what the state it's in. Optimization is dead. Too much hype marketing. Monolith without crunch in 6 years put out 2 new Xenoblade games. 1 remake. 3 expansions. Assisted with BOTW and TOTK. Splatoon 3 and a few more and all are excellent. Switch power or not that's a well-oiled studio.

BattleBit Remastered seems to work fine on RTX 4090.

Not as long as expectations stay ahead of what hardware can reliably deal with.

Better hardware also makes development easier and faster, yet with diminishing returns it becomes harder and harder to keep up with linear expectations for graphics fidelity, while also delivering 60fps and ray tracing.

The problem is that a few companies don't want to use the middleware that has become standard in the industry.

When you separate the development of the game engines from the development of the games, then you can make games in reasonable time spans.

Notice how Square Enix's output has been a lot better than it was ten years ago, now that they've started to use middleware (UE4) in addition to their proprietary engines.

There are also less profits per copy sold (due to inflation) and therefore publishers want to sell more copies of a title through re-releases.

If Skyrim, for example, wasn't selling as much as it did with each new SKU, Bethesda would've had more pressure to start ESVI sooner. But instead, Skyrim was selling well so there is a negative incentive to develop ESVI because it can cannibalize sales while having development costs to meet.