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Large-Scale Asset Purchases by the Federal Reserve: Did They Work?

43 Pages Posted: 24 Mar 2010  

Joseph Gagnon

Peterson Institute

Matthew Raskin

affiliation not provided to SSRN

Julie Remache

Federal Reserve Banks - Federal Reserve Bank of New York

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Date Written: March 1, 2010

Abstract

Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.

Keywords: Term Premium, Portfolio Balance, Zero Bound, Monetary Policy, Duration, Bond Yield

JEL Classification: E43, E44, E52, E58, G12

Suggested Citation

Gagnon, Joseph and Raskin, Matthew and Remache, Julie and Sack, Brian P., Large-Scale Asset Purchases by the Federal Reserve: Did They Work? (March 1, 2010). FRB of New York Staff Report No. 441. Available at SSRN: https://ssrn.com/abstract=1576596 or http://dx.doi.org/10.2139/ssrn.1576596

Joseph Gagnon

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.piie.com

Matthew Raskin

affiliation not provided to SSRN ( email )

Julie Remache (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5671 (Phone)
202-452-2301 (Fax)

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