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Expectations of Large-Scale Asset Purchases

By Andrew Foerster and Guangye Cao


During and after the recent financial crisis, the Federal Reserve took several unprecedented actions in an attempt to bolster the economy. Before the crisis, monetary policy typically consisted of the Federal Open Market Committee (FOMC) setting a target for the federal funds rate, the overnight interest rate at which banks lend to one another. Once the federal funds rate reached its effective zero lower bound, however, the FOMC turned to a number of unconventional tools to stimulate the economy. One such tool, largescale asset purchases (LSAPs)—often referred to as quantitative easing (QE)—consists of the Federal Reserve purchasing U.S. Treasury securities and agency mortgage-backed securities (MBS) with the aim of driving down longer-term interest rates, thereby stimulating economic activity. Because LSAPs are an unconventional tool for the FOMC, their effectiveness remains uncertain due to several factors. First, because th

Year: 2013
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