PRELIMINARY DISCUSSION DRAFT September 11–12, 2018
10
On asset purchases, the FOMC extended the horizon and increased the pace
meaningfully, promising to buy up to an additional $1.150 trillion by year-end—
$750 billion of MBS, $100 billion of agency debt, and $300 billion of Treasuries. The
staff forecast, the discussion at the meeting, and the reports from the Fed districts were
so downbeat that we readily reached agreement to do even more than the most
accommodative policy option (Alternative A) included in the set of options circulated
before the meeting, a distinct break from FOMC tradition. At the same time, we firmed
up our forward guidance by noting that the near-zero rates were likely to persist “for an
extended period.” In the ritualized communication between the FOMC and market
participants, an “extended period” was intended to be, and was interpreted as, longer
than “some time.”
These were the last substantial policy actions taken until the fall of 2010, when
disappointing economic growth would lead the Committee toward another round of
asset purchases. From the spring of 2009 through spring of 2010, incoming data on the
economy and financial markets indicated that the recovery broadly was following the
path expected: GDP growth recovered, and the unemployment rate leveled out and
showed signs of turning lower; core inflation, though not falling as far as feared,
remained quite low; and financial conditions stopped tightening and began to improve.
But that outcome was hardly satisfactory: in its projections made over that period,
the FOMC expected to undershoot both its employment and price stability objectives for
many years to come. The staff estimated that the economic effects of the negative 6
percent funds rate level from the March exercise could be roughly replicated by
additional asset purchases of about $2 trillion —much more than the $1.150 trillion
undertaken. Yet, we took no further steps until the outlook deteriorated further.
The decision not to take even larger policy actions reflected the perception that
the benefits and costs associated with additional asset purchases appeared to be
roughly balanced, even with those unsatisfactory economic outcomes. The benefits
were seen as highly uncertain, with some FOMC members expecting a limited effect
on long rates once market liquidity had been restored. On the cost side, various
Committee members continued to worry about exit, about affecting the allocation of
capital in the economy by purchasing mortgage-backed securities, and about risking
un-anchoring inflation expectations by being perceived as “monetizing the debt” in
our purchases of Treasury securities.
8
The policy that was in place felt extreme, and while most saw it as clearly warranted
by the dire circumstances, it also prompted a sense of unease among some participants
and outside observers. Indeed, a substantial portion of each FOMC meeting over this
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