We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs)
and draw lessons for monetary policy going forward. A rough consensus from previous studies is
that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue
that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual
population of possible events and exploit interpretations provided by the business press. We find
that Fed actions and announcements were not a dominant determinant of 10-year yields and that
whatever the initial impact of some Fed actions or announcements, the effects tended not to
persist. In addition, the announcements and implementation of the balance-sheet reduction do not
seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet
to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s
balance sheet. Our conclusion is that the most important and reliable instrument of monetary
policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward.