What's in a name? Purchases and Sales of Financial Assets As a Monetary Policy Instrument

Abstract

Large-scale asset purchases are now a conventional tool for monetary policymakers. In August 2019, Federal Reserve balance sheet expansion began for the first time since December 2015, with the federal funds rate away from the zero lower bound (ZLB). The Federal Reserve expanded the balance sheet by $400 billion by the end of 2019. This paper studies active balance sheet management by the Federal Reserve with the federal funds rate away from and at the ZLB. Purchases and sales of financial assets allow the Federal Reserve to simultaneously stabilize financial markets, thus moderate long-term interest rates, and pursue the dual mandate. At the ZLB, active financial asset portfolio management alleviates the effects of the constraint on the federal funds rate.