s adjustment of the federal funds rate in normal times. after all, adjustments to the balance sheet are in many respects a substitute for changes in the federal funds rate. both instruments attempt to influence broader financial conditions in order to achieve a desired economic outcome. however, the way in which the fomc implemented asset purchases differed in important ways from the manner in which it has historically adjusted the federal funds rate. with this contrast in mind, i raise a set of policy questions that could be considered in designing a purchase program. first, should the balance sheet be adjusted in relatively continuous but smaller steps, or in infrequent but large increments? the earlier round of asset purchases involved the latter approach, which caused the market response to be concentrated in several days on which significant announcements were made. that might have been appropriate in circumstances when substantial and front - loaded policy surprises had benefits, but different approaches may be warranted in other circumstances. indeed, it contrasts with the manner in which the fomc has historically adjusted the federal funds rate, which has typically involved incremental changes to the policy instrument. second, how responsive should the balance sheet be to economic conditions? historically, the fomc has determined the federal funds target rate based on the committee ’ s assessment of the outlook for economic growth and inflation. if changes in the balance sheet are now acting as a substitute for changes in the federal funds rate, then one might expect balance sheet decisions to also be governed to a large extent by the evolution of the fomc ’ s economic forecasts. the earlier purchase program, in contrast, did not demonstrate much responsiveness to changes in economic or financial conditions. indeed, the execution of the program largely involved confirming the expectations that were put in place by the two early announcements. third, how persistent should movements in the balance sheet be? an important feature of traditional monetary policy is that movements in the federal funds rate are not quickly reversed, which makes them more influential on broader financial conditions. a change that was expected to be transitory would instead move conditions very little. for similar reasons, one could argue that movements in the balance sheet should have some persistence in order to be more effective. fourth, to what extent should the fomc communicate about the likely path of the balance sheet? the fomc often communicates about the path of the federal funds rate or provides other forward - looking information that allows market participants to anticipate that path. this anticipation of policy actions is

federal reserve bank of new york staff report no. 441, march 2010. several private - sector firms have estimated yield effects of similar magnitude. in addition, a working paper by james hamilton and jing wu, “ the effectiveness of alternative monetary policy tools in a zero lower bound environment, ” finds that changes in the federal reserve ’ s asset holdings produce considerable yield effects. under this view, the fomc ’ s influence on financial conditions is associated with the size and composition of its securities portfolio. this perspective provides a clear rationale for the reinvestment decision made at the august fomc meeting. the decline in the size of the federal reserve ’ s portfolio that would have occurred in the absence of the reinvestment program would have amounted to a passive tightening in the stance of monetary policy, as the portfolio balance effect would have gradually reversed. moreover, the extent of this tightening was increasing in response to the weakening of the economy, as lower longerterm yields were leading to more rapid repayment of mbs. this perverse effect was seen by the fomc as working against its efforts to reach its dual mandate. in effect, the policy approach that was implemented before the august meeting acted to mute the amplitude of movements in longer - term interest rates. as rates declined in response to a weakening of the economy, the federal reserve ’ s mbs holdings would decline more rapidly, effectively adding to the supply of duration held by the market. 4 this increase in the duration held by the market would tend to damp the decline in yields. with the change in strategy at its august meeting, the fomc no longer lets its aggregate duration holdings flow back into the market. this approach allows long - term interest rates to adjust fully to a weakening of the economy, which should act to better stabilize the economy. implementing the reinvestment policy so far, i have focused on the fomc ’ s august policy decision ; however, you may also be interested in the details of how the desk has actually implemented the reinvestment policy. the instructions from the fomc to the desk, from both the august fomc statement and the directive that was adopted at that meeting, were to keep the total face value of domestic securities held in the soma portfolio near their level at that time. the published size of the securities portfolio just ahead of the august meeting was $ 2. 054 trillion, so the desk adopted this level as the target for the portfolio. this is a notable