In 2008, aggregate demand in the United States collapsed and triggered deflation. The U.S. Federal Reserve, unable to lower short-term interest rates, turned to large-scale asset purchases (LSAP) to stimulate the economy. It purchased housing agency debt, mortgage-backed securities, and longer-term U.S. Treasury bonds. How did these actions affect financial markets and deflationary expectations?

Glick and Leduc (2012) collected 10 events, either statements by the Federal Open Market Committee (FOMC) or speeches by Fed Chairman Ben Bernanke, between November 2008 and November 2010. They included five events from the first round of asset purchases (QE1) and five from the second round (QE2). They reported that news of looser monetary policy caused the 10-year Treasury rate, the value of the dollar against several currencies, and the S&P Goldman Sachs Commodity Index to fall.

Kozicki, Santor and Suchanek (2015) culled 20 events related to unconventional Fed monetary policy. In addition to announcements during QE1 and QE2, they included events from the third round of LSAP that began in August 2012 (QE3). They found that news of LSAP lowered gold and silver prices during QE1 and QE2 and raised them during QE3.

Brainard (2017) observed that there is still much that policymakers do not understand about how LSAP affects the economy. In contrast, she noted that the effects of short-term interest rates have been extensively investigated.

Read the entire article on the RIETI website.

Photo taken by Matt Barnard and sourced from Pexels.