Reddit was the same way.

You have /r/gaming. /r/games. /r/truegaming. /r/videogames. /r/videogame. Etc.

Each community was slightly different in subtle ways, but some people were subscribed to multiple (basically identical) communities. Others self-sorted into different communities based on moderation style and community vibes.

Not to mention that your idea of how federation should work kind of ignores moderation and community preferences. Communities hosted on Beehaw are tightly moderated. There may be other communities that want something less strict. How do these two reconcile with one another? What happens if a conversation is removed on one instance but kept around on another?

If local mods only have local power, they can get quickly overwhelmed as you effectively need a mod team on every single instance. Smaller instances wouldn't necessarily have the manpower to have their own dedicated mods for literally everything.