traditional relationships between those variables. the fact that official purchases of financial assets are driven by different factors than those driving private investors suggests that we would probably see a somewhat different combination of capital flows, exchange rates and interest rates in the absence of official intervention. this makes the task of assessing the probable trajectory of growth and inflation more complicated. it makes it harder to assess the likely evolution in financial conditions and asset prices. and it makes it harder to assess the effects of the present stance of monetary policy on aggregate demand and inflation. to the extent that these forces act to raise asset prices, lower interest rates and reduce risk premia, it is harder for the markets to assess how much of the very favorable conditions are likely to reflect fundamentals and prove more durable. this can contribute to an increased willingness to raise leverage in the investment community and to take on more exposure to risk. for the same reason, this phenomenon can act to mask or offset the effects of high levels of present and expected future government borrowing on interest rates, perhaps contributing to a false sense of reassurance that we can continue to run large structural deficits without risk of crowding out private investment and damaging future growth. what might this mean for the conduct of monetary policy? to the extent that these forces act to put downward pressure on interest rates and upward pressure on other asset prices, they would contribute to more expansionary financial conditions than would otherwise be the case. and, if all else were equal, which of course is unlikely ever to be the case, monetary policy in the affected countries would have to adjust in response ; policy would have to act to offset these effects in order to achieve the same impact on the future path of demand and inflation. to do otherwise would run the risk that monetary policy would be too accommodative, pulling resources from the future in a way that would alter the trajectory for the growth of the capital stock, perhaps amplifying the imbalances, and compromising the price stability. finally, these aspects of global monetary arrangements and financial conditions have important implications for how we communicate about monetary policy. they strengthen the case for why central banks should be clear about their objectives and credible in their commitment to price stability. they reinforce the case for preserving the flexibility to adjust policy in response to changing conditions. and they underscore the importance of being open about the greater level of uncertainty we face in understanding the forces at work on the trajectory of demand and inflation. central banks, of course, need to

brian p sack : implementing the federal reserve ’ s asset purchase program remarks by mr brian p sack, executive vice president of the federal reserve bank of new york, at the global interdependence center central banking series event, philadelphia, 9 february 2011. * * * it is a pleasure to be back in my hometown of philadelphia and to be invited to speak tonight at this event hosted by the global interdependence center ( gic ) and the federal reserve bank of philadelphia. the gic has an impressive history of promoting public dialogue about monetary policy and other topics, and it is a privilege to be able to participate in that process. tonight i will focus my comments on the implementation of the recent monetary policy decisions of the federal reserve and the associated implications for its balance sheet. as always, the views i will express are my own and do not represent those of the federal open market committee ( fomc ) or the federal reserve system. unconventional policy decisions in the second half of 2010, the fomc made two important policy decisions about the size and composition of the federal reserve ’ s balance sheet. in august, it decided to begin reinvesting the principal payments from its holdings of agency debt and mortgage - backed securities into longer - term treasury securities, thereby keeping the amount of domestic assets held in the system open market account ( soma ) portfolio unchanged at about $ 2 trillion. in november, the fomc announced that it intended to expand the soma portfolio by purchasing an additional $ 600 billion of longer - term treasury securities through the end of the second quarter of 2011, bringing the intended level of domestic securities holdings to $ 2. 6 trillion. those decisions were aimed at providing more monetary policy stimulus to the economy. the fomc saw the additional stimulus as warranted because it viewed the progress toward its mandated objectives of full employment and price stability as disappointingly slow. 1 in effect, the committee was using the size and composition of its balance sheet as a policy instrument, given that it had already employed its traditional means of easing monetary policy – decreasing short - term interest rates – to the fullest extent possible. federal reserve chairman bernanke has noted that the intention of asset purchases is similar to that associated with changes in short - term interest rates, in that they are meant to affect economic activity by influencing broader financial conditions. 2 but while the intention of the recent policy decisions may be similar to traditional monetary policy adjustments, the implementation of them is not.