The Federal Reserve’s large-scale asset purchases (LSAPs) made between late 2008 and March 2010 were effective in lowering longer term private borrowing rates, according to analysis in the report. While the effects of these purchases were especially noticeable in the mortgage market, they appear to be widespread, extending to markets for Treasury securities, corporate bonds and interest rate swaps. These findings suggest that monetary policy can still ease financial conditions when the Fed’s traditional policy instrument, the target federal funds rate, is set near its zero lower bound.
In this study, authors Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack review the Federal Reserve’s experience with implementing the LSAPs between late 2008 and March 2010. They explain that the target fed funds rate was set as low as possible in December 2008. Thus, to further ease the stance of monetary policy as the economic outlook deteriorated, the central bank purchased substantial quantities of assets with medium and long maturities—housing agency debt, agency mortgage-backed securities (MBS) and Treasuries—to drive down private borrowing rates.
In their analysis, the authors show that by reducing the net supply of assets with long maturities, the purchases led to economically meaningful and long-lasting reductions in longer term interest rates on a range of securities. The reductions primarily reflect lower risk premiums, including term premiums. The LSAP programs had an especially powerful effect on longer term interest rates on agency debt and agency MBS by improving market liquidity and removing assets with high prepayment risk from private portfolios.
Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics; Matthew Raskin is an economic analyst and Julie Remache an assistant vice president in the Markets Group of the Federal Reserve Bank of New York; Brian Sack is executive vice president and head of the Markets Group as well as manager of the System Open Market Account for the Federal Open Market Committee.