The Effect of the Federal Reserve’s Securities Holdings on Longer-Term Interest Rates

Abstract

In an effort to promote more accommodative financial conditions following the financial crisis of 2008 and the ensuing recession, and at a time when the conventional monetary policy tool--the federal funds rate--was at its effective lower bound, the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). This note outlines a way to estimate by how much Federal Reserve securities holdings resulting from these purchase programs reduce longer-term interest rates. In this note, we focus on another channel through which LSAPs may affect the economy: the portfolio balance channel.