jeremy c stein : large - scale asset purchases speech by mr jeremy c stein, member of the board of governors of the federal reserve system, at the third boston university / boston fed conference on macro - finance linkages, boston, massachusetts, 30 november 2012. * * * given that the conference theme is macro - finance linkages, i thought i would try to lay out a corporate finance perspective on large - scale asset purchases ( lsaps ). i have found this perspective helpful in thinking both about the general efficacy of lsaps going forward, and about the differential effects of buying treasury securities as opposed to mortgage - backed securities ( mbs ). but before i get started, please note the usual disclaimer : the thoughts that follow are my own and do not necessarily reflect the views of other members of the federal open market committee ( fomc ). i should also mention that these comments echo some that i made in a speech at brookings last month. 1 as i noted in that speech, i support the committee ’ s decision to purchase mortgage - backed securities ( mbs ) at a rate of $ 40 billion per month, in tandem with the ongoing maturity extension program in treasury securities, and its plan to continue with asset purchases if the committee does not observe a substantial improvement in the outlook for the labor market. i will start with the case of treasury lsaps, and then go on to discuss the differences that arise when the fed purchases mbs instead. one thing that seems clear in the data is that if you buy a lot of long - term treasury securities, this exerts significant downward pressure on their yields and term premiums. indeed, the fed ’ s past actions are likely one important reason why treasury term premiums are now near historic lows, on the order of minus 80 basis points, according to a model used by the board staff. 2 moreover, while this is not entirely uncontroversial, my own reading of the evidence is that there has also been substantial pass - through to corporate bond rates. based on this evidence, a reasonable estimate is that, if the fed were to undertake an additional $ 500 billion treasury lsap, both long - term treasury and corporate bond rates might be expected to decline by something on the order of 15 to 20 basis points. this observation leads to an important conceptual question : how should one expect a firm to respond when its long - term borrowing costs fall not because of a change in the expected

soon, the federal open market committee ( fomc ) will devote time at its regular meetings to assess the lessons from these events, supported by analysis by staff from around the federal reserve system. we will publicly report the conclusions of our discussions, likely during the first half of next year. in the meantime, anyone who is interested in learning more can find information on the federal reserve board ’ s website. 1 let me turn now from the longer - term issues that are the focus of the review to the nearer - term outlook for the economy and for monetary policy. so far this year, the economy has performed reasonably well. solid fundamentals are supporting continued growth and strong job creation, keeping the unemployment rate near historic lows. although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market. along with this favorable picture, we have been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. when the fomc met at the start of may, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate. since then, the picture has changed. the crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy. our contacts in business and agriculture report heightened concerns over trade developments. these concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. for example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year. against the backdrop of heightened uncertainties, the baseline outlook of my fomc colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows. inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year. however, the risks to this favorable baseline outlook appear to have grown. last week, my fomc colleagues and i held our regular meeting to assess the stance of monetary policy. we did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy