Abstract
One aspect of the U.S. Federal Reserve's efforts to mitigate the financial crisis was the accumulation of unprecedented levels of assets. As financial and economic conditions become healthy and sustainable, the U.S. Federal Reserve will wind down these positions. Doing so without disruption poses serious challenges, but they are challenges that the U.S. Federal Reserve has considered carefully and that can be managed successfully. The approach features caution and transparency and must be coordinated with traditional monetary policy. This paper describes the potential effects of the U.S. Federal Reserve's exit activities and how it will control them.
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Notes
The views expressed here are not necessarily shared by the Federal Open Market Committee or by other members of the staff of the Federal Reserve Bank of New York.
In discussing these facilities, I am not including any provision of credit intended to support specific institutions, including those associated with the Maiden Lane LLCs. I include the Term Securities Lending Facility with short-term lending facilities, even though it provided the market with Treasury securities rather than reserves, because it was often used to find funding for positions in less liquid securities.
An alternative explanation is that the large-scale asset purchases have had no effect and that the low levels of rates and spreads simply reflect other factors. However, I believe the evidence indicates that the asset purchases have contributed to the low level of longer-term rates.
The U.S. Federal Reserve's Expanded Balance Sheet. Remarks at the Money Marketeers of New York University, New York City. December 2, 2009. http://www.newyorkfed.org/newsevents/speeches/2009/sac091202.html.
Some have discussed whether the draining of excess reserves has effects on the economy beyond the implications for short-term interest rates. In my view, it would be surprising if there were significant effects on the real economy or inflation associated with substituting one short-term, liquid, risk-free asset (reverse repos or term deposits with the Fed) for another (reserves), except for the degree to which that substitution affects the U.S. Federal Reserve's control of overnight interest rates.
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Remarks delivered in the session, “Implementing the Fed's Balance Sheet Policies” at the NABE Policy Conference, March 8, 2010.
*Brian P. Sack is the executive vice president of the Markets Group at the Federal Reserve Bank of New York. He is also the Manager of the System Open Market Account for the Federal Open Market Committee (FOMC). The Markets Group oversees domestic open market and foreign exchange trading operations and the provision of account services to foreign central banks. Prior to joining the New York Federal Reserve, Mr. Sack was a vice president at Macroeconomic Advisers and the deputy director of the Monetary Policy Insights service offered by that firm. Before joining Macroeconomics Advisers in 2004, Mr. Sack was the head of the Monetary and Financial Markets Analysis section at the Board of Governors of the Federal Reserve System. He has published a number of research articles in academic journals in the fields of economics and finance. Mr. Sack received his doctorate in economics from the Massachusetts Institute of Technology in 1997 and a bachelor's degree from the University of Vermont in 1992.
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Sack, B. Preparing for a Smooth (Eventual) Exit. Bus Econ 45, 158–163 (2010). https://doi.org/10.1057/be.2010.14
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DOI: https://doi.org/10.1057/be.2010.14