prices that it was given by congress. i believe that the program delivered what could have been expected from it. in particular, let me highlight its success along two dimensions. first, the lsap2 program made broad financial conditions more accommodative. this conclusion can be drawn from the behavior of financial markets from late august 2010 to the program ’ s implementation date in november 2010 – a period during which market participants moved from seeing such a program as a remote possibility to expecting it with near certainty. 3 asset price movements over this period included a decline in real interest rates, a narrowing of risks spreads, an increase in equity prices, and a decline in the dollar – exactly the pattern that one would expect to be generated from additional monetary policy accommodation. these changes likely supported economic growth and the creation of employment relative to what would have been realized in the absence of the program. 4 second, the lsap2 program appears to have raised inflation expectations from unusually low levels and reduced the threat of deflation. the downside risks to inflation had become quite threatening by last summer. breakeven inflation rates had moved to levels that were well below those consistent with the fomc ’ s mandate, even for forward measures covering periods beginning several years ahead. in addition, the pricing of deflation risk, as computed by looking at treasury inflation - protected securities with different amounts of accrued inflation, reflecting fairly substantial odds of deflation over the next several years. 5 since that estimates of the contribution of additional risk coming from the increased size of the portfolio range from 60 percent to 80 percent, while estimates of the impact of its longer duration range from 20 percent to 40 percent. see, for example, chairman ben s. bernanke ( 2010 ), “ the economic outlook and monetary policy ”, remarks at the federal reserve bank of kansas city economic symposium, jackson hole, wyoming, august 27. one would expect market prices to incorporate nearly all of the effects of the programs in advance rather than during the actual implementation of the program. thus, the period before the november implementation is the most relevant period for assessing the program ’ s effects. for example, see chung et al ( 2011 ), “ have we underestimated the likelihood and severity of zero lower bound events ” and vice chairman janet yellen ( 2011 ), “ the federal reserve ’ s asset purchase program ”, remarks at the allied social science associations annual meeting, denver, colorado, january 8. tips are designed with a

produce significant upward pressure on interest rates or a tightening of broader financial conditions, given our view that the effects of the program arise primarily from the stock of our holdings rather than the flow of our purchases. while there has been considerable volatility in treasury yields over the past several weeks, we attribute those movements primarily to incoming economic data and to broader risk events. however, we will continue to watch the markets and assess their adjustment to the end of the purchase program. future evolution of the soma portfolio while i am sure you are happy to hear more about our actions to date, i realize that you may be even more interested in the evolution of the soma portfolio going forward. just to be clear, i will not be saying anything about the likelihood of prospective policy actions beyond what has been conveyed in fomc communications. however, i would like to make a few points about the portfolio under those prospective actions. as noted earlier, the current directive from the fomc is to reinvest principal payments on the securities we hold in order to maintain the level of domestic assets in the soma portfolio. this approach can be interpreted as keeping monetary policy on hold. indeed, one can generally think of the stance of monetary policy in terms of two tools – the level of the federal funds rate, and the amount and type of assets held on the federal reserve ’ s balance sheet. the fomc has decided to keep both of these tools basically unchanged for now. given the considerable amount of uncertainty about the course of the economy, market participants have observed that the next policy action by the fomc could be in either direction. if economic developments lead the fomc to seek additional policy accommodation, it has several policy options open to it that would involve the soma portfolio, as noted by chairman bernanke in his testimony last week. one option is to expand the balance sheet further through additional asset purchases, with the just - completed purchase program presenting one possible approach. another option involves shifting the composition of the soma portfolio rather than expanding its size. as noted earlier, a sizable portion of the additional risk that the soma portfolio has assumed to date came from a lengthening of its maturity, suggesting that the composition of the portfolio can be used as an important variable for affecting the degree of policy stimulus. lastly, the chairman mentioned that the fomc could give guidance on the likely path of its asset holdings, as the effect on liquidity in treasury bills has worsened to some degree