Sorry, Powell can’t be called the greatest Fed chair ever

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Subscribe to enjoy similar stories. Even if he does oversee a soft landing for the US economy, Federal Reserve chair Jerome Powell will not deserve a place in the annals of history as the greatest central banker of all time. Not because bringing down inflation without causing a recession is as much a matter of luck as of skill—and economists will spend years debating how much of each Powell had—but because the mistakes the Fed made in 2021 will haunt the US economy for years to come.

That alone takes Powell out of contention. In the spring of 2020, as the world was in full pandemic panic and the US economy was in free-fall, the Federal Reserve turned to the emergency playbook from the financial crisis: It cut interest rates to zero and restarted quantitative easing (QE), buying up longer-dated Treasuries and mortgage-backed securities, known as MBS. This time, however, it went much bigger—expanding its balance sheet to $8.9 trillion in 2022, compared to $2 trillion in 2009.

By the summer of 2020, even as many businesses were shut down, the housing and mortgage markets appeared to be functioning. And yet the Fed kept buying MBS. It did not begin tapering its purchases until November 2021, and did not stop buying new MBS until June 2022—a full year after inflation took off, and years into a housing boom.

This, a recent economic research paper argues, is why mortgage rates were so low during the pandemic. In the early 2020s, the authors say, monetary policy juiced the housing market by lowering the spread on mortgages. Not only did the Fed buy MBS directly—at its peak it owned about a quarter of the MBS market—but its actions also increased the amount of MBS the banks bought.