decisions made by the fomc in august and november were intended to influence financial conditions in a manner that would support the economic recovery and return employment and inflation, over time, to levels consistent with the fomc ’ s objectives. one way that this might occur is through a portfolio balance channel. 12 under this view, removing duration risk from the market would tend to keep longer - term real interest rates lower than they otherwise would be and would encourage investors to move into other types of assets, thereby making broader financial conditions more accommodative. these intended effects were apparent in financial markets from mid - august to early november, when investors increasingly anticipated the federal reserve ’ s decision to expand its balance sheet. over that period, longer - term real interest rates declined, breakeven inflation rates moved up toward more normal levels, equity prices rose notably and risk spreads on many credit instruments narrowed. this configuration of asset price movements is the pattern that is typically associated with additional monetary policy easing. since early november, one of the notable developments in financial markets has been the sharp increase in longer - term interest rates. at first glance, this change may seem at odds with the portfolio balance channel. however, it is important to understand the factors that led to the increase in interest rates in the current circumstances. the upward movement in longer - term interest rates in large part reflects the greater optimism among investors about the outlook for economic growth. investors revised up their baseline forecasts for the economy and reduced the perceived downside risks that they see around that outlook. this shift in the outlook led the market to price in the possibility of earlier increases in short - term interest rates and to scale back the size of asset purchases that they expect from the federal reserve. both of those developments contributed to the significant rise in yields. in contrast, the rise in yields does not appear to be driven by the concerns expressed by some that the asset purchase program would unleash a considerable rise in u. s. inflation and inflation expectations to levels well above those consistent with the federal reserve ’ s the portfolio balance channel was discussed by chairman bernanke in a speech at the jackson hole symposium in august 2010. bis central bankers ’ speeches mandate. such an outcome would be detrimental to the economic outlook, leading to downward pressure on risky asset prices and a substantial weakening in the value of the dollar. however, what has taken place in u. s. markets to date does not resemble this outcome. indeed, over the period since the

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