The St. Louis Fed's article "A New Frontier: Monetary Policy with Ample Reserves" states that the Fed now uses the IOER and ON RRP rates to set the FFR, instead of open market operations, which are no longer capable of influencing interest rates.

But the Fed just indicated it will resume treasury rollovers and net asset purchases next month, given the ongoing rate collapse (since December). Before 2009, it purchased/sold assets continuously to alter the money supply to clamp the effective FFR within its target range. How does the Fed choose its asset purchase rate now?

  • $\begingroup$ The Fed announces a target for its balance sheet, and then buys/sells to the meet the target. You would have to go through the statements to see the changes in this stance. So that answers a simpler question: what determines buy/sell decisions. How the targets for the balance sheet are set - which appears to be what the question is asking - is harder to answer. From my perspective, there is not a lot of convincing theory suggesting what the effects of central bank balance sheet expansion are. $\endgroup$ – Brian Romanchuk Aug 6 '19 at 12:37
  • $\begingroup$ Yes, assuming differentiable asset purchase rate $A(t)$ and assets $A(t)$ (i.e. smooth, steady changes rather than sharp, one-off buys/sells), what (if any) relation does (or should) the Fed use to choose $A'(t)$? $\endgroup$ – alexchandel Aug 7 '19 at 6:30

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