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

TLDR: 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, which 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.

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.

Figures

Table 4 show, the estimated longer-term debt supply effects are somewhat higher in this specification than in the term premium regressions. The estimated coefficients of 0.07 and 0.10 on the unadjusted and duration-adjusted debt stocks imply that LSAPs have reduced the 10-year term premium by 82 basis points (unadjusted model) or 58 basis points (duration-adjusted model).50

Table 5b: Total Effect of LSAPs on 10-Year Term Premium (bps)

Table 5b: Total Effect of LSAPs on 10-Year Term Premium (bps)

Full text

Gagnon, Joseph; Raskin, Matthew; Remache, Julie; Sack, Brian
Working Paper
Large-scale asset purchases by the Federal
Reserve: Did they work?
Staff Report, No. 441
Provided in Cooperation with:
Federal Reserve Bank of New York
Suggested Citation: Gagnon, Joseph; Raskin, Matthew; Remache, Julie; Sack, Brian (2010) :
Large-scale asset purchases by the Federal Reserve: Did they work?, Staff Report, No. 441,
Federal Reserve Bank of New York, New York, NY
This Version is available at:
http://hdl.handle.net/10419/60927
Standard-Nutzungsbedingungen:
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen
Zwecken und zum Privatgebrauch gespeichert und kopiert werden.
Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle
Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich
machen, vertreiben oder anderweitig nutzen.
Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen
(insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten,
gelten abweichend von diesen Nutzungsbedingungen die in der dort
genannten Lizenz gewährten Nutzungsrechte.
Terms of use:
Documents in EconStor may be saved and copied for your
personal and scholarly purposes.
You are not to copy documents for public or commercial
purposes, to exhibit the documents publicly, to make them
publicly available on the internet, or to distribute or otherwise
use the documents in public.
If the documents have been made available under an Open
Content Licence (especially Creative Commons Licences), you
may exercise further usage rights as specified in the indicated
licence.

Federal Reserve Bank of New York
Staff Reports
Large-Scale Asset Purchases by the Federal Reserve:
Did They Work?
Joseph Gagnon
Matthew Raskin
Julie Remache
Brian Sack
Staff Report no. 441
March 2010
This paper presents preliminary findings and is being distributed to economists
and other interested readers solely to stimulate discussion and elicit comments.
The views expressed in this paper are those of the authors and are not necessarily
reflective of views of the Peterson Institute, the Federal Reserve Bank of
New York, or the Federal Reserve System. Any errors or omissions are the
responsibility of the authors.

Large-Scale Asset Purchases by the Federal Reserve: Did They Work?
Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack
Federal Reserve Bank of New York Staff Reports, no. 441
March 2010
JEL classification: E43, E44, E52, E58, G12
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.
Key words: term premium, portfolio balance, zero bound, monetary policy, duration,
bond yield
Gagnon: Peterson Institute for International Economics (e-mail: jgagnon@piie.com). Raskin:
Federal Reserve Bank of New York (e-mail: matthew.raskin@ny.frb.org). Remache: Federal
Reserve Bank of New York (e-mail: julie.remache@ny.frb.org). Sack: Federal Reserve Bank
of New York (e-mail: brian.sack@ny.frb.org). The authors thank Seamus Brown, Mark Cabana,
Michelle Ezer, Michael Fleming, Jeremy Foster, Joshua Frost, Allen Harvey, Spence Hilton,
Warren Hrung, Frank Keane, Karin Kimbrough, David Lucca, Brian Madigan, Patricia Mosser,
Lisa Stowe, Richard Wagreich, and Jonathan Wright for helpful comments, Clara Sheets for
valuable research assistance, and Carol Bertaut for guidance on the foreign official holdings
data. The views expressed in this paper are those of the authors and do not necessarily reflect
the position of the Peterson Institute, the Federal Reserve Bank of New York, or the Federal
Reserve System.

1. Introduction
In December 2008, the Federal Open Market Committee (FOMC) lowered the target for
the federal funds rate to a range of 0 to 25 basis points. With its traditional policy instrument set
as low as possible, the Federal Reserve faced the challenge of how to further ease the stance of
policy as the economic outlook deteriorated. The Federal Reserve met this challenge in part by
purchasing substantial quantities of assets with medium and long maturities in an effort to drive
down private borrowing rates. These large-scale asset purchases (LSAPs) have greatly increased
the size of the Federal Reserve’s balance sheet, and the additional assets may remain in place for
years to come.
To be sure, the Federal Reserve undertook other important initiatives to combat the
financial crisis. It launched a number of facilities to relieve financial strains at specific types of
institutions and in specific markets. In addition, to provide even more stimulus, it used public
communications about its policy intentions to lower market expectations of the federal funds rate
in the future. All of these strategies helped to ease financial conditions and support a sustained
economic recovery. Over time, though, the credit extended by the liquidity facilities has
declined and the dominant component of the Federal Reserve’s balance sheet has become the
assets accumulated under the LSAP programs.
The decision to purchase large volumes of assets came in two steps. In November 2008,
the Federal Reserve announced purchases of housing agency debt and agency mortgage-backed
securities (MBS) of up to $600 billion. In March 2009, the FOMC decided to substantially
expand its purchases of agency-related securities and to purchase longer-term Treasury securities
as well, with total asset purchases of up to $1.75 trillion, an amount twice the magnitude of total

- 2 -

Federal Reserve assets prior to 2008.
2
The FOMC stated that the increased purchases of agency-
related securities should “provide greater support to mortgage lending and housing markets” and
that purchases of longer-term Treasury securities should “help improve conditions in private
credit markets.”
In this paper, we review the Federal Reserve’s experience with implementing the LSAPs
and describe some of the challenges raised by such large purchases in a relatively short time. In
addition, we discuss the economic mechanisms through which LSAPs may be expected to
stimulate the economy and present some empirical evidence on those effects. In particular,
LSAPs reduce the supply to the private sector of assets with long duration (and, in the case of
mortgage securities, highly negative convexity) and increase the supply of assets (bank reserves)
with zero duration and convexity.
3
To the extent that private investors do not view these assets
as perfect substitutes, the reduction in supply of the riskier longer-term assets reduces the risk
premiums required to hold them and thus reduces their yields. We assess the extent to which
LSAPs had the desired effects on market interest rates using two different approaches and find
that LSAPs caused economically meaningful and long-lasting reductions in longer-term interest
rates on a range of securities, including on securities that were not included in the purchase
programs. We show that these reductions in interest rates primarily reflect lower risk premiums
rather than lower expectations of future short-term interest rates. We conclude with a discussion
of issues raised by these policies and potential lessons for implementing monetary policy at the
zero bound in the future.

2
The Treasury Department also established a program to purchase agency MBS beginning in September 2008. As
of year-end 2009 it had purchased $220 billion of such securities. This program is much smaller than the Federal
Reserve LSAPs and no specific purchase amount targets were announced, so it is not included in our analysis below.
3
Negative convexity is defined in the next section. It arises from the ability of mortgage borrowers to prepay their
loans.

Frequently asked questions

Q1. What are the contributions mentioned in the paper "Large-scale asset purchases by the federal reserve: did they work?" ?

In this paper, the authors explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. The authors 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. 

Q2. What are the future works mentioned in the paper "Large-scale asset purchases by the federal reserve: did they work?" ?

52 Clearly, study of both the theoretical and empirical issues raised by LSAPs would be helpful in order to assess whether they can be employed even more effectively in the future. 

Q3. What were the common types of OMOs used to alter the supply of bank reserves?

Outright OMOs, in conjunction with repurchase agreements and reverse repurchase agreements, traditionally were used to alter the supply of bank reserves in order to influence conditions in the federal funds market. 

Q4. What does the Federal Reserve do to reduce the amount of the security that it holds?

By purchasing a particular asset, the Federal Reserve reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others, while simultaneously increasing the amount of short-term, risk-free bank reserves held by the private sector. 

Q5. How many firms were hired to provide trading and advisory services at the start of the program?

the New York Fed conducted                                                             14 Four investment firms were hired to provide trading and advisory services at the start of the program: BlackRock, Goldman Sachs Asset Management, PIMCO, and Wellington Management Company. 

Q6. Why do the authors not include private issued debt securities?

The authors do not include privately issued debt securities held by private investors because these securities have a net zero supply from the point of view of the private sector, and because demand and supply for them are likely not exogenous with respect to the term premium. 

Q7. What are the challenges in isolating the effects of LSAPs?

A particular challenge in isolating the effects of LSAPs is that the announcements the authors identify are likely to have contained non-LSAP information relevant to yields, including policy measures and updates to the FOMC’s economic outlook. 

Q8. What was the main reason for the concentration of purchases of agency debt?

Purchases of agency debt were concentrated in medium-term securities because of thesmall outstanding supply at longer maturities (Chart 1). 

Q9. How long have the studies been able to find anoticeable effects?

14 -   Subsequent time-series studies, using longer spans of data, generally have found anoticeable effect of shifts in the maturity structure of Treasury debt on the term structure. 

Q10. Why was there no auction mechanism to measure market supply?

Because the MBS purchases were arranged with primary dealer counterparties directly,there was no auction mechanism to provide a measure of market supply. 

Q11. What is the appropriate measure of the net supply of longer-term debt securities by the public sector?

the appropriate measure of the net supply of longer-term debt securities by the public sector would include longer-term Treasury securities less the total amount of longer-term debt held by the SOMA and by foreign official institutions. 

Q12. What is the way to scale the purchases?

Another way to scale the purchases is to measure the amount of duration they removed from the market using the concept of “10-year equivalents”, or the amount of 10-year par Treasury securities that would have the same duration as the portfolio of assets purchased. 

Q13. What is the argument that the LSAPs did not have a lasting effect?

Some observers, noting that the 10-year Treasury yield has not declined on net since theinception of the LSAP programs, have argued that the LSAPs did not have a lasting effect. 

Q14. What was the Federal Reserve’s strategy to ease the economic outlook?

With its traditional policy instrument set as low as possible, the Federal Reserve faced the challenge of how to further ease the stance of policy as the economic outlook deteriorated. 

Q15. What is the effect of the LSAPs on the yields of the Treasury securities?

as discussed below, neither the language about future policy rates in the FOMC statements nor the LSAP announcements appear to have had a substantial effect on the expected future federal funds rate.- 4 -    reduction in longer-term yields instead has likely come through a narrowing in risk premiums.