The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies

Abstract

After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools -- quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate -- in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve's quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect -- subtracting 1¼ percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions -- does not occur until early 2015, while the peak inflation effect -- adding ½ percentage point to the inflation rate -- is not anticipated until early 2016.

Keywords: Monetary policy reaction function, federal funds rate, forward guidance, large-scale asset purchases, zero lower bound

JEL Classification: E5