Stresses in liquidity and market functioning could also be temporary, as the market learns to adapt to the Desk’s presence in the markets. So far, though, there seems to be little evidence that the current pace of purchases is prompting deterioration in market liquidity or straining the market’s ability to deliver securities. Conclusion Overall, I believe the Desk has effectively and efficiently carried out the FOMC’s directive to purchase additional Treasury securities and agency MBS in a transparent fashion that achieves the FOMC’s policy objectives, supports orderly market functioning, and obtains competitive market prices. I also believe that the Federal Reserve’s balance sheet policies have been effective in easing financial conditions, particularly with respect to helping make historically low borrowing costs available to existing and prospective American homeowners, as well as lowering interest rates to spur business investment and household spending. Thank you for listening to me today. I would be happy to take a few questions. References Brainard, William and James Tobin. 1968. “Pitfalls in Financial Model Building.” American Economic Review, Vol. LVIII, no. 2 (May). Fleming, Michael. 2000. “The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives.” Federal Reserve Bank of New York Economic Policy Review, Vol. 6, no. 1 (April): 129–45. Fleming, Michael. 2002. “Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings.” Federal Reserve Bank of New York Staff Reports, no. 145, March. 21  The Desk also purchases dollar roll contracts when implied financing rates are sufficiently positive. Such operations occurred in December 2011.

Indeed, the FOMC chose to adjust the policy by extending the MEP to the end of 2012, beyond its planned completion in June 2012, in order to support a stronger economic recovery and help ensure that inflation, over time, reached a rate most consistent with its dual mandate. Market participants recognized the program’s conditionality and adjusted their expectations for additional policy accommodation prior to the announcement of the extension of the program. Indeed, results from the Desk’s Survey of Primary Dealers prior to the announcement indicated that respondents placed 60 percent odds on the Committee either increasing the duration of Federal Reserve holdings, for instance by extending the MEP, or expanding the size of the portfolio through asset purchases without short-term Treasury sales at the June 2012 FOMC meeting.3 There are also other examples of the FOMC adjusting its balance sheet based on its ongoing assessment of the economy. The advantage of the current policy is that it relates asset purchases to economic conditions and the efficacy and costs of the policy in a more explicit and transparent manner. This should enable market participants to recalibrate their expectations more continuously in light of incoming information and may provide some additional reassurance against downside risks. Despite the changes in communication around the current purchases, their intended purpose and the way that I anticipate the purchases will impact the economy are similar to previous policies. The purchases are conducted to help achieve the FOMC’s dual mandate of maximum employment and price stability.