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James Hamilton: Effects of the Fed's large-scale asset purchases

JH:

Econbrowser: Effects of the Fed's large-scale asset purchases: Some Federal Reserve officials apparently have a rule of thumb for thinking about the impact of the Fed's large-scale asset purchases.... Brian Sack, Executive Vice President of the Federal Reserve Bank of New York, offered this assessment on Wednesday of what it would mean if the Fed were to decide from here on to let the assets it currently holds mature without rolling them over:

If all asset classes in the SOMA were allowed to run off, the portfolio would decline by about $250 billion per year on average over the first several years…. [T]his path for the balance sheet would, in terms of its effects on the economy, be roughly equivalent to raising the federal funds rate by just over 25 basis point per year over the course of several years.

Sack's proposed rule of thumb seems to be that each $100 billion decrease in the Fed's holdings of long-term securities would roughly correspond to what in normal times we'd measure with a 10 basis point increase in the fed funds rate…. In my research with Cynthia Wu, we… estimate that $400 billion in such purchases would only move the 10-year yield by about 10 basis points, or 2.5 basis points for each $100 billion….

G>ranted, Cynthia's and my estimates of the effects of LSAP are somewhat smaller than those obtained by other researchers, and any of these estimates are subject to considerable uncertainty. But these calculations illustrate that the Fed's rule of thumb could easily be off by a factor of two.

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