Informing the public about the Federal Reserve
What are the Federal Reserve's large-scale asset purchases?
In December 2008, as evidence of a dramatic slowdown in the U.S. economy mounted, the Federal Reserve reduced its target for the federal funds rate--the interest rate that depository institutions charge each other for borrowing funds overnight--to nearly zero, in order to provide stimulus to household and business spending and so support economic recovery. With the funds rate near its effective lower bound, leaving little scope for further reductions, in late 2008 the Federal Reserve began a series of large-scale asset purchases (LSAPs).
In conducting LSAPs, the Fed purchases longer-term securities issued by the U.S. government and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. The Fed purchases the securities in the private market through a competitive process; that is, the Fed does not purchase government securities directly from the U.S. Treasury. The Fed's purchases reduce the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields. Lower yields on mortgage-backed securities mean lower mortgage rates as well. Moreover, private investors respond to lower yields on U.S. Treasury securities and agency-guaranteed mortgage-backed securities by seeking to acquire assets with higher yields–assets such as corporate bonds and other privately issued securities. Investors' purchases should raise the prices of those securities and reduce their yields. Thus, the overall effect of the Fed's LSAPs is to put downward pressure on yields of a wide range of longer-term securities, support mortgage markets, and promote a stronger economic recovery.