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February 25, 2011

Unconventional Monetary Policy and Central Bank Communications

Remarks by
Janet L. Yellen
Vice Chair
Board of Governors of the Federal Reserve System
at the
The U.S. Monetary Policy Forum
New York, New York

February 25, 2011

The U.S. Monetary Policy Forum has become an important venue for promoting
an exchange of views among policymakers, academics, and financial market participants.
I’m pleased to participate in this panel on lessons learned about unconventional monetary
policy. In my remarks today, I’ll highlight the role of central bank communications in
bolstering the effectiveness of unconventional monetary policy.1 It is not my intention to
provide new information about the outlook for the U.S. economy or monetary policy.
The Federal Open Market Committee (FOMC) has deployed unconventional
monetary policy tools to promote economic recovery and price stability since late 2008.
In particular, after the intensification of the financial crisis, conventional monetary policy
became constrained by the zero lower bound on nominal interest rates. At that point, the
FOMC began to provide forward guidance about the likely path of the federal funds rate,
and the Federal Reserve also announced a program to buy agency debt and mortgagebacked securities (MBS). Over time, the purchase program was augmented substantially
and was expanded to include longer-term Treasury securities. Furthermore, on several
occasions, the FOMC has communicated to the markets about the likely longer-term
trajectory of its holdings of Treasury securities, agency debt, and agency MBS.
In the remainder of my remarks, I will present some evidence regarding the
effectiveness of these policy tools and discuss important similarities and differences in
the transmission mechanisms through which they influence the economy. I will also
present some simulations of a macroeconometric model to illustrate the importance of

1

These remarks solely reflect my own views and not necessarily those of any other member of the Federal
Open Market Committee. I appreciate assistance from the members of the Board staff--including William
English, Yuriy Kitsul, Jean-Philippe Laforte, Andrew Levin, David Reifschneider, and David Wilcox--who
contributed to the preparation of these remarks.

-2clear and effective communication in conjunction with the use of these unconventional
policy tools.
Some General Observations
It is important to recognize at the outset that conventional and unconventional
monetary policy actions bear many similarities. Forward guidance concerning the path of
the federal funds rate, for example, is explicitly intended to influence market expectations
concerning the future trajectory of shorter-term interest rates and thereby affect longerterm interest rates. That said, standard monetary policy actions also typically alter not
just current short-term rates, but the anticipated path of short-term rates as well,
influencing longer-term rates through the identical channel. In fact, central bankers have
long recognized that this “expectations channel” operates most effectively when the
public understands how policymakers expect economic conditions and monetary policy
to evolve over time, and how the central bank would respond to any changes in the
outlook.
The transmission channels through which longer-term securities purchases and
conventional monetary policy affect economic conditions are also quite similar, though
not identical. In particular, central bank purchases of longer-term securities work through
a portfolio balance channel to depress term premiums and longer-term interest rates. The
theoretical rationale for the view that longer-term yields should be directly linked to the
outstanding quantity of longer-term assets in the hands of the public dates back at least to
the 1950s.2

2

Early examples include Culbertson (1957), Tobin (1958), and Modigliani and Sutch (1966). More
recently, Vayanos and Vila (2009) study a preferred-habitat model in which short- and long-term assets are
imperfect substitutes in investors’ portfolios and the effect of arbitrageurs is limited by their risk aversion
or other market frictions such as capital constraints.

-3Each of these policy tools tends to generate spillovers to other financial markets,
such as boosting stock prices and putting moderate downward pressure on the foreign
exchange value of the dollar. My reading of the evidence, which I will briefly review, is
that both unconventional policy tools--the use of forward guidance and the purchases of
longer-term securities--have proven effective in easing financial conditions and hence
have helped mitigate the constraint associated with the zero lower bound on the federal
funds rate.
The Effectiveness of Forward Guidance
I will begin with an assessment of the FOMC’s forward guidance concerning the
federal funds rate, which began when the FOMC reduced its funds rate target to a range
of 0 to 1/4 percentage point. In particular, the December 2008 FOMC meeting statement
indicated that “economic conditions are likely to warrant exceptionally low levels of the
federal funds rate for some time.” Identical guidance was reiterated in January 2009, and
in March 2009 the phrase “for some time” was changed to “for an extended period.”
Figure 1 suggests that the provision of guidance concerning the future path of the
federal funds rate likely contributed to more accommodative financial market conditions.
In particular, the consensus outlook of professional forecasters regarding the path of the
funds rate shifted down markedly in the Blue Chip survey published at the beginning of
February 2009 (the solid line) compared with the survey published two months earlier
(the dashed line).3
A crucial feature of the FOMC’s policy communications is that the Committee’s
forward guidance has been framed not as an unconditional commitment to a specific
federal funds rate path, but rather as an expectation that is explicitly contingent on
3

See Blue Chip Financial Forecasts (2008, 2009).

-4economic conditions. Since November 2009, the Committee has specifically indicated
that the relevant economic conditions include “low rates of resource utilization, subdued
inflation trends, and stable inflation expectations.” An important consequence of such
conditionality, serving to enhance the effectiveness of the guidance, is that incoming
information about economic and financial developments has led forecasters and investors
to revise their outlook for the path of the funds rate even in the absence of a change in the
forward guidance language.
The evolution of financial market expectations concerning the funds rate path
over the past year illustrates that the conditional nature of the FOMC’s forward guidance
allows incoming economic data to shift market views. For example, as shown in the left
panel of figure 2, the expected path of the funds rate shifted down markedly during the
spring and early summer of last year in the wake of weaker readings on economic activity
and prices and of some concerns about potential spillovers from developments in Europe.
Those expectations shifted down somewhat further during late summer and early autumn.
Conversely, as shown in the right panel, funds rate expectations have shifted upward over
the past several months in response to more-positive economic news and greater
confidence that a self-sustaining economic recovery may be taking hold.
Down the road, once the recovery is well established and the appropriate time for
beginning to firm the stance of policy appears to be drawing near, the FOMC will
naturally need to adjust its “extended period” guidance and develop an alternative
communications strategy to shape market expectations about the policy outlook.
However, if there were an unexpected faltering of the recovery or a substantial widening
of downside risks to economic activity and inflation, the forward guidance now in place

-5might well be sufficient to facilitate an outward shift in the expected path of the funds
rate, just as we saw over the course of last year.
If financial market participants appeared to be expecting policy firming to begin
somewhat sooner than policymakers considered desirable or appropriate under such
circumstances, the language of the forward guidance could be adjusted to shift
expectations toward the somewhat longer horizon over which the Committee expected
the federal funds rate to remain extraordinarily low. Figure 3 illustrates the potential for
such a change in forward guidance to support economic activity. In the left panel, the
dashed line denotes the baseline path for the federal funds rate as embedded in current
financial market data, while the solid line corresponds to an alternative path in which the
initiation of policy firming is postponed by one year. If policymakers viewed that
alternative path as appropriate and market participants came to share that view, then
financial conditions would become significantly more accommodative, even in the
absence of any change in the current level of the funds rate. As shown in the right panel,
a simulation of the FRB/US model--a macroeconometric model developed and
maintained at the Federal Reserve Board--indicates that such a shift in policy
expectations would be associated with a lower trajectory for the unemployment rate
(solid line) and a somewhat higher path of core inflation (dashed line) over coming years.
The Effectiveness of Asset Purchases
I will now turn to an assessment of the FOMC’s program of longer-term securities
purchases. Both theory and empirical evidence suggest that asset prices and yields are
affected not only by current securities purchases but also, importantly, by market
expectations concerning future FOMC securities holdings. This observation implies that

-6central bank communications pertaining to any important feature of the path of the
Federal Reserve’s balance sheet should influence financial conditions.
Event studies can therefore be helpful in gauging the financial market effects of
such communications.4 For example, table 1 reports the response of selected financial
variables on several key dates associated with the FOMC’s purchases of longer-term
securities. In late November 2008, the Federal Reserve announced that it would purchase
up to $600 billion in agency MBS and agency debt, and Chairman Bernanke provided
further details in a speech one week later. On March 18, 2009, the FOMC announced
that the program would be expanded by an additional $850 billion in purchases of agency
securities and by $300 billion in purchases of longer-term Treasury securities. Evidently,
each of those communications was associated with substantial declines in longer-term
nominal and real Treasury yields and in rates on agency MBS and corporate debt.
Last August, the FOMC announced that it would begin reinvesting principal
payments on agency MBS and agency debt into longer-term Treasury securities, and over
the subsequent couple of months or so, the public remarks of Federal Reserve officials
made note of the possibility of a further expansion of the portfolio. Consequently, when
the Committee announced in early November that it intended to purchase an additional
$600 billion in longer-term Treasury securities, that decision was largely anticipated by
financial market participants, and it occasioned only minimal market response. However,
taken together the movements in longer-term interest rates that occurred between the
August and November FOMC meetings are strikingly similar to those on the prior

4

A burgeoning literature focuses on the experience with asset purchase programs of the Federal Reserve
and other central banks; for example, see D’Amico and King (2010); Gagnon and others (2010); Hamilton
and Wu (2010); and Joyce and others (2010).

-7announcement dates shown in the table, bolstering the judgment that these securities
purchases contribute to more accommodative financial conditions.
One complication that arises in evaluating the contribution of portfolio balance
effects to the observed movements in longer-term rates is that news about large-scale
asset purchases may also influence investors’ perceptions regarding the likely path of
short-term interest rates. Such effects may not have been very important, however, when
the FOMC announced the expansion of its securities purchases in March 2009. As
shown in Figure 4, that announcement appeared to have only modest effects on the
outlook of professional forecasters (left panel) and investors (right panel) regarding the
likely trajectory of the federal funds rate. Thus, the substantial decline in longer-term
yields following this announcement appears to have mainly reflected the effect of the
purchases in pushing down term premiums rather than a shift in the expected path of the
funds rate.5 This evidence suggests that the portfolio balance channel of influence is not
only operative but also fairly large.
That said, as we saw in figure 2, the expected path of the federal funds rate does
appear to have flattened for a time during the late summer and early autumn of last year.
Even allowing for that change in near-term policy expectations, however, it seems
reasonable to conclude that the announcement of additional securities purchases mainly
affected financial conditions through the portfolio balance channel.

5

As noted earlier, in the March 2009 FOMC statement, the Committee did modify its forward guidance by
indicating that exceptionally low levels of the federal funds rate would likely be warranted “for an extended
period” (rather than “for some time”, as in the December 2008 and January 2009 FOMC statements), but
that modification does not appear to have substantially influenced professional forecasters’ expectations
about the near-term path of the federal funds rate. To the extent that the expanded asset purchases were
expected to strengthen the economic recovery, the change in the forward guidance may have helped clarify
that the FOMC did not intend to offset that effect by accelerating the initiation of policy firming;
consequently, expectations for the trajectory of the federal funds rate were little changed on balance.

-8To assess the macroeconomic effects of the Fed’s large-scale asset purchase
program, I would like to highlight some findings from a recent study by four Federal
Reserve System economists.6 As shown in figure 5, the authors constructed an
illustrative baseline trajectory for the Federal Reserve’s securities holdings over the
course of this decade (solid line) as well as an alternative trajectory corresponding to a
counterfactual scenario in which the FOMC never decided to initiate any securities
purchases (dashed line).
The baseline incorporates the first round of asset purchases--which brought the
Federal Reserve’s securities holdings to a little more than $2 trillion. It embeds an
assumption that the FOMC will complete the purchases announced last November so that
the balance sheet expands to about $2.6 trillion by the middle of this year. From that
point forward, the authors assume that the overall size of the portfolio will remain
unchanged until mid-2012 and then shrink gradually at a rate sufficient to return it to its
pre-crisis trend line by mid-2016, whereupon the Federal Reserve resumes expanding its
holdings at the trend rate. Full convergence of the composition of the portfolio is not
complete until 2017, however, as the average maturity of the portfolio is still somewhat
elevated in 2016. It should also be noted that the trend line itself rises gradually over
time as a consequence of steady growth in demand for U.S. currency.
Of course, the baseline trajectory is purely illustrative: The actual evolution of
the Federal Reserve’s balance sheet will depend on the decisions that the FOMC will
make in light of economic and financial developments. Nonetheless, the overall
characteristics of this assumed trajectory seem broadly consistent with the sense of the
Committee’s discussions last spring. In particular, as reported in the minutes of the April
6

See Chung and others (2011).

-92010 FOMC meeting, most Committee participants expressed a preference for
renormalizing the size and composition of the Federal Reserve’s balance sheet over a
period of about five years that would commence following the initiation of policy
firming.
Figure 6 shows the results of simulations of the FRB/US model to gauge the
effect of these asset purchases on the unemployment rate and core personal consumption
expenditures (PCE) inflation. For this purpose, the baseline path (denoted by the dashed
line in each panel) is constructed using historical data in conjunction with the latest set of
consensus projections from the Survey of Professional Forecasters conducted by the
Federal Reserve Bank of Philadelphia. Then the staff model is used to simulate the
counterfactual scenario in which the FOMC never conducts any asset purchases (denoted
by the solid line in each panel).7 The pace of recovery under the baseline scenario is
expected to be painfully slow. But the counterfactual scenario suggests that conditions
would have been even worse in the absence of the Federal Reserve’s securities purchases:
The unemployment rate would have remained persistently above 10 percent, and core
inflation would have fallen below zero this year. Of course, considerable uncertainty
surrounds those estimates, but they nonetheless suggest that the benefits of the asset
purchase programs probably have been sizeable.
My final observation concerning the FOMC’s asset purchase program pertains to
the importance of clear and effective communications in the years ahead. As I noted
earlier, both theory and empirical evidence suggest that market prices and yields at any
particular time reflect both the Federal Reserve’s current securities holdings and also
7

Because the latest release of the Survey of Professional Forecasters provided forecasts of the
unemployment rate only through 2014, the authors extrapolated the forecasts through 2018 using the
extended consensus forecasts reported in the October 2010 Blue Chip survey.

- 10 markets participants’ expectations for its future holdings. Consequently, a shift in
expectations concerning the trajectory of the Federal Reserve’s balance sheet could have
an important effect on financial conditions going forward.
In particular, financial conditions depend on market expectations not only
concerning the amount of the FOMC’s purchases but also concerning the anticipated
timing and pace of the eventual unwinding of those holdings. For example, financial
conditions would likely tighten immediately if market participants came to expect a more
rapid renormalization of the Federal Reserve’s balance sheet. In contrast, if market
participants were to anticipate a more gradual renormalization, financial conditions
would likely become more stimulative.
To illustrate the potential importance of such changes in expectations, figure 7
depicts a scenario in which markets come to anticipate that the Federal Reserve will
shrink its balance sheet more rapidly than in the baseline scenario. The left panel shows
the assumed contour of an expected acceleration of asset sales that would renormalize the
overall size of the portfolio within about two years (solid line), roughly twice as fast as
under the baseline scenario (dashed line). The announcement of such a strategy would
cause a substantial rise in term premiums relative to the baseline scenario, and, assuming
no offsetting change in the path of the federal funds rate, the resulting higher level of
long-term interest rates would damp aggregate spending. The right panel depicts the
macroeconomic effects of the more rapid runoff of the balance sheet in terms of
deviations from the baseline scenario: The unemployment rate (solid line) is significantly
higher, and core PCE inflation (dashed line) is somewhat lower.

- 11 Conclusion
In conclusion, I believe that both forward guidance and large-scale asset
purchases have been effective tools for providing additional monetary accommodation
under circumstances in which conventional monetary policy has been constrained by the
zero lower bound on the federal funds rate. My colleagues on the FOMC and I are
regularly reviewing the asset purchase program in light of incoming information, and we
will adjust the program as needed to promote our statutory mandate of maximum
employment and stable prices. Recognizing the importance of market expectations to the
effectiveness of unconventional policies, the Committee will continue to seek ways to
enhance the clarity and effectiveness of our monetary policy communications.

- 12 References
Blue Chip Financial Forecasts: Top Analysts’ Forecasts of U.S. and Foreign Interest
Rates, Currency Values, and the Factors That Influence Them (2008 and 2009).
New York: Aspen Publishers, monthly, www.aspenpublishers.com/blue-chippublications.htm.
Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and John C. Williams (2011).
“Have We Underestimated the Likelihood and Severity of Zero Lower Bound
Events?” Working Paper series 2011-01. San Francisco: Federal Reserve Bank
of San Francisco, January,
www.frbsf.org/publications/economics/papers/2011/wp11-01bk.pdf.
Culbertson, John M. (1957). “The Term Structure of Interest Rates,” Quarterly Journal
of Economics, vol. 71 (November), pp. 485-517.
D’Amico, Stefania, and Thomas B. King (2010). “Flow and Stock Effects of LargeScale Treasury Purchases,” Finance and Economics Discussion Series 2010-52.
Washington: Board of Governors of the Federal Reserve System, September,
www.federalreserve.gov/pubs/feds/2010/201052/201052abs.html.
Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack (2010). “Large-Scale
Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve
Bank of New York Staff Reports 441. New York: Federal Reserve Bank of New
York, March, www.ny.frb.org/research/staff_reports/sr441.html.
Hamilton, James D., and Jing (Cynthia) Wu (2011). “The Effectiveness of Alternative
Monetary Policy Tools in a Zero Lower Bound Environment,” working paper.
San Diego: University of California, San Diego, February,
dss.ucsd.edu/~jhamilto/zlb.pdf.
Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong (2010). “The
Financial Market Impact of Quantitative Easing,” Working Paper 393. London:
Bank of England, July (revised August),
www.bankofengland.co.uk/publications/workingpapers/wp393.pdf.
Modigliani, Franco, and Richard Sutch (1966). “Innovations in Interest Rate Policy,”
American Economic Review, vol. 56 (March), pp. 178-97.
Tobin, James (1958). “Liquidity Preference as Behavior towards Risk,” Review of
Economic Studies, vol. 25 (February), pp. 65-86.
Vayanos, Dimitri, and Jean-Luc Vila (2009). “A Preferred-Habitat Model of the Term
Structure of Interest Rates,” NBER Working Paper Series 15487. Cambridge,
Mass.: National Bureau of Economic Research, November,
www.nber.org/papers/w15487.

U.S. Monetary Policy Forum
February 2011

Janet L. Yellen
Vice Chair
Board of Governors
of the Federal Reserve System

Unconventional Monetary Policy
and Central Bank Communications

III
2008

IV

I

II
2009

III

IV

December 1, 2008
February 1, 2009

I
2010

II

Note: This figure depicts the consensus of professional forecasters regarding the quarterly average value of the federal funds
rate at forecast horizons from 0 to 6 quarters ahead as of December 1, 2008 (dashed line) and February 1, 2009 (solid line);
these projections are taken from Blue Chip Financial Indicators, a monthly survey owned by Aspen Publishers, Inc.
Copyright © 2008, 2009 by Aspen Publishers, Inc. All rights reserved.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Percent

Figure 1: The Effects of Forward Guidance
on the Expected Path of the Federal Funds Rate

I

2011

II III IV I

2012

II III IV I

November 3, 2010
February 22, 2011

2013

II III IV

Note: This figure depicts financial market expectations for the federal funds rate at forecast horizons from 0 to 12 quarters ahead;
these expectations are computed by staff using price quotes from CME Group on federal funds and Eurodollar futures contracts.
The left panel depicts expectations as of April 1, 2010 (solid line), August 2, 2010 (long dashed line), and November 3, 2010 (short
dashed line). The right panel depicts expectations as of November 3, 2010 (dashed line) and February 22, 2011 (solid line).

2011

2010

2012

0.0
II III IV

0.0
II III IV I

0.5

0.5

II III IV I

1.0

1.0

I

1.5

2.0

1.5

2.0

2.5

2.5

April 1, 2010
August 2, 2010
November 3, 2010

Percent

November 2010 to February 2011

Percent

April to November 2010

Figure 2: The Conditionality of Forward Guidance
and the Evolution of Federal Funds Rate Expectations

2013

2014

2015

2016

2011

2012

2013

2014

2015

2016

Unemployment rate
Core PCE inflation

Note: This figure depicts simulation results of the Federal Reserve Board staff’s FRB/US model of the U.S. economy. The left
panel shows the path of the federal funds rate under the baseline scenario corresponding to market expectations (solid line) and under
an alternative “later lift-off” scenario (dashed line). The right panel shows the unemployment rate (solid line) and the core personal
consumption expenditures (PCE) inflation rate (dashed lines), expressed as deviations of the alternative scenario from baseline.

-0.5

2012

0.0

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

-0.4

2011

Market Expectations
Later Lift-Off

Percentage Points

Unemployment and Inflation

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Percent

Federal Funds Rate

Figure 3: Macroeconomic Effects
of an Illustrative Change in Forward Guidance

-21
-20
-50
-15

Date

Nov. 25, 2008

Dec. 1, 2008

March 18, 2009

Aug. 10 to
Nov. 3, 2010

-54

-49

-22

-24

10-Year
TIPS
Yield

-13

-15

-12

-44

30-Year
MBS
Yield

-22

-47

-25

-16

10-Year BBB
Corporate
Bond Yield

Note: The table displays basis point changes from close of business on the day before the announcement to close of business on
the day of the announcement, with the exception of the final row, which shows the change from close of business on the day before
the Aug. 10, 2010, Federal Open Market Committee (FOMC) meeting through the close of business on the day of the Nov. 3, 2010,
FOMC meeting. Changes in the 10-year nominal Treasury yield are computed using a smoothed yield curve estimated by staff from
off-the-run Treasury coupon securities. Changes in the yield on 10-year Treasury inflation-protected securities (TIPS) are computed
by staff using a smoothed inflation-indexed yield curve. Changes in the yield on 30-year mortgage-backed securities (MBS) are
computed using Bloomberg data on securities issued by Fannie Mae. Changes in the yield on 10-year BBB-rated corporate bonds are
computed using a smoothed yield curve estimated by staff using Merrill Lynch data.

10-Year
Treasury
Yield

Table 1: Responses of Longer-Term Interest Rates
to News about the Federal Reserve’s Asset Purchases

2010

I

III
2009

II

IV

March 17, 2009
March 19, 2009

I

III
2010

II

Market Expectations

IV

Note: The left panel shows the consensus outlook for the federal funds rate as of March 1, 2009 (dashed line) and April 1, 2009
(solid line); these projections are taken from Blue Chip Financial Indicators, a monthly survey owned by Aspen Publishers, Inc.
Copyright © 2008, 2009 by Aspen Publishers, Inc. All rights reserved. The right panel shows market expectations computed
by staff using price quotes from CME Group on federal funds and Eurodollar future contracts as of March 17, 2009 (dashed line)
and March 19, 2009 (solid line).

2009

0.0

0.0
IV

0.2

0.2
III

0.4

0.4

II

0.6

0.6

I

0.8

0.8

IV

1.0

1.0

III

1.2

1.2

II

1.4

1.4

I

1.6

1.8

1.6

1.8

2.0

2.0
March 1, 2009
April 1, 2009

Percent

Percent

Blue Chip Consensus Outlook

Figure 4: Did the March 2009 FOMC Announcement
Shift the Expected Path of the Federal Funds Rate?

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Illustrative Baseline Scenario
No Asset Purchase Program

Note: This figure depicts the Federal Reserve’s securities holdings under an illustrative baseline scenario (solid line) and under an
alternative scenario in which the Federal Reserve never conducts any securities purchases (dashed line).
Source: Figure 9 of Chung, Laforte, Reifschneider, and Williams (2011).

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

$ Trillions

Figure 5: An Illustrative Scenario
for the Federal Reserve’s Securities Holdings

2010

2012

2014

2016

2018

Illustrative Baseline Scenario
No Asset Purchase Program

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

2010

Percent

2012

2014

2016

2018

Core PCE Inflation

Note: This figure depicts simulation results of the FRB/US model of the U.S. economy. The left panel shows the unemployment
rate and the right panel shows the core personal consumption expenditures (PCE) inflation rate. Each panel depicts the illustrative
baseline (solid line) and an alternative scenario in which the Federal Reserve never conducts any securities purchases (dashed line).

5

6

7

8

9

10

11

Percent

Unemployment Rate

Figure 6: Gauging the Macroeconomic Effects
of the Federal Reserve’s Asset Purchases

2010

2012

2014

2016

2018

Illustrative Baseline Scenario
Rapid Run-Off

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2011

2012

2013

Percentage Points

2014

2015

2016

Unemployment Rate
Core PCE Inflation

Unemployment and Inflation

Note: This figure depicts simulation results of the FRB/US model of the U.S. economy. The left panel shows the path of the
Federal Reserve’s securities holdings (in $ trillions) under an illustrative baseline scenario (solid line) and an alternative “rapid runoff” scenario (dashed line). The right panel shows the unemployment rate (solid line) and the core personal consumption expenditures
(PCE) inflation rate (dashed lines), with results expressed as deviations of the alternative scenario from the baseline scenario.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

$ trillions

Securities Holdings

Figure 7: Macroeconomic Effects of an Illustrative Change
in the Path of Securities Holdings