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Executive Summary

Before the financial crisis and recession, unconventional monetary policies were still mostly theoretical concepts on the drawing board, untested on the battlefield.

​​In practice, they have given central banks such as the Federal Reserve much-needed tools when the traditional policy interest rate is near zero.

​​We have learned a great deal over the past few years about their effectiveness, but also about some of their limitations. As I have discussed, in normal times, certain types of unconventional policies are best mothballed and kept in reserve in case needed. But, more importantly, the experience with these policies means that if another situation arises where we need to call on these tools, we are ready and prepared to do so.

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Will Unconventional Monetary Policy Be the New Normal?

Will Unconventional Monetary Policy Be the New Normal?
Oct 4     ( From FRBSF )​
The subject of my talk today is the unconventional monetary policies pursued by the Federal Reserve over the past several years and how I see our resulting experiences shaping what will likely be the new normal for monetary policy in the future.

​​ I should stress that my remarks represent my own views and do not necessarily reflect the views of others in the Federal Reserve System.

J​​ohn C. Williams, President and CEO, Federal Reserve Bank of San Francisco

Will Unconventional Monetary Policy Be the New Normal?  $MACRO, $STUDY, $FED
In my talk, I’ll focus specifically on two types of unconventional monetary policy that the Fed and other central banks put in place in recent years.

​​​The first is large-scale asset purchases, referred to by most people outside the Federal Reserve as quantitative easing, or QE.

The evidence to date provides support for the view that financial markets are segmented and that asset purchase programs affect interest rates and other asset prices. There have been numerous studies of the effects of our asset purchases on longer-term interest rates.3 This analysis suggests that each $100 billion of asset purchases lowers the yield on 10-year Treasury notes by around 3 to 4 basis points, that is between 0.03 to 0.04 percentage point. That might not sound like much. But consider the Fed’s so-called QE2 program in 2010-11 that totaled $600 billion of purchases. According to estimates, that program lowered 10-year yields by about 20 basis points.

​​​The second is forward policy guidance; that is, communicating likely future Fed policy actions.

​​​By varying the forward-looking language in this statement, the FOMC can alter business and investor views about where monetary policy, and in particular, the federal funds rate, is likely headed. This in turn affects longer-term interest rates, as investors adjust their views of what they will earn on short-term securities in the future. Thus, the Federal Reserve’s forward policy guidance can affect longer-term interest rates by changing people’s expectations about the future path of monetary policy.