The Fed’s LSAP program
In December 2008, when the U.S. economy entered its dreadful recessionary phase, the Federal Reserve (or Fed) reduced the federal funds rate to nearly zero in order to stimulate household and business spending and support economic recovery.
Further, the Fed also began a series of large-scale bond (BND) purchases (or LSAPs), including the purchase of long-term Treasuries (TLT)(IEF) and mortgage-backed (VNQ)(IYR) securities, to put downward pressure on yields of a wide range of longer-term securities, to support mortgage markets, and to promote a stronger economic recovery.
As the economy began to recover and the Fed’s balance sheet size started growing, it started making sense for the Fed to taper its asset and bond purchases and start looking at ways to normalize its balance sheet. The Fed’s balance sheet has grown from $0.9 billion at the start of 2008 to an unprecedented $4.5 trillion as of October 22, 2014.
The end of asset purchases
Based on substantial improvement in the outlook for the labor market since the inception of the FOMC’s asset purchase program, the FOMC decided to conclude its asset purchase program this month. Signs of continued underlying strength in the broader economy, supporting the FOMC’s ongoing progress towards its dual objectives, also motivated this decision.
The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling over maturing Treasury securities at auction. By keeping the committee’s holdings of longer-term securities sizable, this policy should help maintain accommodative financial conditions.
The committee also reaffirmed that it will maintain the current 0%-to-0.25% target federal funds rate rate for some time. Find out why in the next part of this series.