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The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases

Author

Listed:
  • Joseph Gagnon

    (Peterson Institutet for International Economics)

  • Matthew Raskin

    (Federal Reserve Bank of New York)

  • Julie Remache

    (Federal Reserve Bank of New York)

  • Brian Sack

    (Federal Reserve Bank of New York)

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.

Suggested Citation

  • Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    • Handle: RePEc:ijc:ijcjou:y:2011:q:1:a:1
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    References listed on IDEAS

    as
    1. Campbell, John Y & Viceira, Luis, 2005. "The Term Structure of the Risk-Return Tradeoff," CEPR Discussion Papers 4914, C.E.P.R. Discussion Papers.
    2. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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