bis-菲利普·N·杰斐遜-貨幣政策的實(shí)施和傳導(dǎo)

Forreleaseondelivery

5:00p.m.EDT

March27,2023

ImplementationandTransmissionofMonetaryPolicy

Remarksby

PhilipN.Jefferson

Member

BoardofGovernorsoftheFederalReserveSystem

atthe

H.ParkerWillisLecture

WashingtonandLeeUniversity

Lexington,Virginia

March27,2023

ThankyouverymuchforinvitingmetobepartoftheH.ParkerWillisLectureSeries.Asyouknow,Dr.WilliswasadistinguishedprofessorhereatWashingtonandLeeUniversity.Amongmanyotheraccomplishments,hehelpedcreatetheFederalReserveSystem.HeservedasthefirstsecretarytotheFederalReserveBoardfrom1914to1918andlaterasthefirstresearchdirector.

BeforeIgofurther,letmeremindyouthattheviewsIwillexpresstodayaremyownandarenotnecessarilythoseofmycolleaguesintheFederalReserveSystem.

ManydiscussionsofmonetarypolicysimplytalkabouttheFederalReservesettingthefederalfundsratetopromoteourgoalsofmaximumemploymentandpricestability,withoutgivingattentiontothespecificactionswetaketoputthefederalfundsratewherewewantit—thatis,tothewayweimplementmonetarypolicy.Andevenineconomicsclassesthatcoverthistopic,theteachingmaterialshavenotalwayscaughtupwiththefactthatwehavepurposelychangedourimplementationframeworkoverthepastdecade.1MycolleaguesattheFedareworkingwitheducatorstoclosethecurriculumgap,andIhopethislecturewillfurtherhelpthisendeavor.2

InhonorofDr.Willis’simportantcontributionstothedesignandcreationoftheFederalReserve,todayIwouldliketotalktoyouabouthowtheFedcurrentlyusesaspecificsetoftoolstoimplementmonetarypolicyandhowmonetarypolicyistransmittedtotheeconomy.Then,Iwilloffersomeconcludingremarks.

1SeetheNPRinterviewwithJaneIhrigandScottWolla(2022a).

2SomeoftheteachingmaterialsthatJaneIhrigandScottWollahavecreatedtoclosethecurriculumgapareavailableontheFederalReserveBankofSt.Louis’swebsiteat

/education/teaching-new-tools-of-monetary-policy

.Formoreinformation,pleaseseeIhrigandWolla(2022b).

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TheFederalFundsMarketandtheFed’sPolicyTargetRange

AsmandatedbytheU.S.Congress,theFederalOpenMarketCommittee’s(FOMC)objectivesaretopromotemaximumemploymentandpricestability.ThemembersoftheBoardofGovernorsandthepresidentsofthe12FederalReserveBanksconstitutetheFOMC.TheFOMCgathersforeightregularlyscheduledmeetingseachyeartodiscusseconomicandfinancialconditionsandtodeliberateonmonetarypolicy.Ineachmeeting,theFOMCestablishesatargetrangeforthefederalfundsrate.Figure1showstheupperboundinredandthelowerboundinblueofthefederalfundstargetrangesince2015.Weseetherangeincreasingin2018asthejobmarketwasstrengtheningandinflationwasmovinguptoward2percent.That’sright—formuchofthedecadebeforethen,theinflationratewasbelow2percent.InMarch2020,whentheCOVID-19pandemichittheeconomy,theFOMCquicklymovedthetargetrangedowntonearzerotosupporteconomicactivity.

Oncemonetarypolicyisset,theFedimplementsmonetarypolicybyusingitspolicytoolstoensurethatthefederalfundsrate(FFR)stayswithintherange.Theeffectivefederalfundrateisdeterminedbymarketforces.Itisavolume-weightedmedianoffederalfundsratesacrossallborrowerseachday.Infigure1,youcanseethattheFedhasbeenabletoimplementmonetarypolicyinsuchawaythattheeffectivefederalfundsrate(EFFR),theblacklineinthefigure,hasindeedstayedwithinthetargetraterangemostofthetime.

TounderstandhowtheFed’stoolswork,itisimportanttounderstandthefederalfundsmarket.Itisamarketwheredepositoryinstitutionsborrowfundsovernightfromcertainfinancialinstitutions,includingotherdepositoryinstitutionsandgovernment-

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sponsoredenterprises.Theseloansareuncollateralized,andtheinterestrateorcostoftheloansisthefederalfundsrate,whichisdeterminedbythesupplyanddemandforreservebalancesthatfinancialinstitutionsholdintheir“checkingaccounts”attheFed.3TheFedcanchangethetotalamountofreservesavailabletothebankingsystemthroughopenmarketoperationsoritslendingprograms.SincetheFedcontrolsthesupplyofreservesandtheamountthatitsuppliesisindependentoftheinterestrate,thesupplyofreservesisillustratedasaverticallineinthestylizedsupplyanddemandcurvesshowninfigure2.4Later,Iwillexplainwhythissupplycurveintersectsthedemandcurve,asshowninfigure2.

Thedemandcurveforreservesinfigure2hasthreesegments.ThetopportionofthedemandcurveiscappedbythediscountratethattheFedsets.Themiddleofthecurveisdownwardsloping,likemostdemandcurves.Thehighertheinterestrateorcosttoborrow,thelowerthequantityofreservesdemanded.Thebottomportionisnearlyflatbecause,atsomepoint,banksdonotfindmuchbenefitfromholdingadditionalreservesotherthanearningtheinterestonreservebalances(IORB)ratefromtheFed.Inotherwords,banksprefertoearnmoneybymakingloanstoconsumersandbusinessesorpurchasingsecuritiesonlyifdoingsogeneratesahigherreturn.Inwhatfollows,Iwillgodeeperintothetopandbottomsegmentsofthedemandcurve.

3Anuncollateralizedorunsecuredloanisaloanthatdoesnotrequireanytypeofcollateral.Incontrast,acollateralizedorsecuredloanisaloanthatisbackedbycollateral,meaningsomethingtheborrowerowns(collateral),suchasU.S.Treasurysecurities,canbetakenbythelenderincasetheborrowerdoesnotpaybacktheloanundertheagreedterms.

4TheFedunderstandsthatseveralfactorsaffectthesupplyofreservesandthatitcanchoosewhatoperationstotake,ifany,inresponse.Asaresult,oneshouldthinkoftheFedascontrollingthesupplyofreservesinthebankingsystem.Foradetaileddiscussionofsupplyanddemandofreserves,seeIhrig,Senyuz,andWeinbach(2020).

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ImplementationTool1:DiscountWindowRateSetsaCeiling

Atthetopofthedemandcurve,weseethediscountrate,whichistheinterestratetheFedchargeswhenitlendsmoneytobanks.5Thediscountrateisanadministeredrate,oraratesetbytheFed,anditisoneofthetoolstheFedusestoimplementmonetarypolicy.Itsetsaceilingforthefederalfundsratebecausebanks,iftheyareingoodstandingandhavecollateralforthediscountwindowloan,canalwaysborrowovernightfundsatthediscountratefromtheFed.Therefore,theyarenotwillingtopayahigherratetoborrowfunds.

Inpractice,however,bankshavedemonstrated,intheabsenceofstress,somereluctancetoborrowfromthediscountwindow.TheyareconcernedthatborrowingfromtheFedmayindicatethatthebankisunabletoborrowfromotherfinancialinstitutions,andthatitsendsanegativesignalabouttheirfinancialconditiontotheworld.6Suchdynamicsarereferredtoasthe“stigma”associatedwiththeuseofthediscountwindow.7Stigmadampensthediscountrate’seffectivenessasaday-to-daytooltheFedcanusetoimplementmonetarypolicy.Thus,alternativeimplementationtoolsarerequired.ThisbringsmetothenextrateIwanttotalktoyouabout,theinterestrateonreservebalances.

5DepositoryinstitutionshaveaccesstothreetypesofdiscountcreditfromtheirregionalFederalReserveBank:primarycredit,secondarycredit,andseasonalcredit,eachwithitsowninterestrate.Weusetheterm“discountrate”asashorthandforprimarycreditrate.Mostcreditatthediscountwindowisdoneattheprimarycreditrate.Formoreinformation,pleaserefertoBoardofGovernors(2022).

6Thelistofbanksthatborrowmoneyfromthediscountwindowispublishedwithatwo-yeardelay.DiscountwindowborrowingincreasedrecentlyfollowingthefailureofSiliconValleyBankandSignatureBank.OnMarch12,2023,theFedannouncedaBankTermFundingFacilitytocomplementthefundingavailableatthediscountwindow;seeBoardofGovernors(2023).

7Foradetaileddiscussionaboutthestigmaassociatedwithdiscountwindowborrowing,pleaseseeCarlsonandRose(2017).

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ImplementationTool2:InterestonReserveBalances

ClosetothebottomofthedemandcurveistheinterestonreservebalancesratedenotedbyIORBrateinfigure2.ThisistheinterestratetheFedpaysonreserveseligibleinstitutionskeepatFederalReserveBanks.8ThisinterestrateistheprimarytooltheFedusescurrentlytoimplementmonetarypolicy.9Inthegraph,observethatthefederalfundsrateisclosetothisrate.Theeconomicforcethatkeepsthesetworatesclosetoeachotheriscalledarbitrage,thesimultaneouspurchaseandsaleoffunds(orgoods)toprofitfromadifferenceinprice.Arbitragekeepspricesoffinancialinstrumentswithsimilarpayoffsclosetoeachother.10Iwillillustratehowarbitrageworkswithanexamplethatmakesitclearwhythefederalfundsratecannotbemuchlowernormuchhigherthantheinterestonreservebalancesrate.

ArbitrageKeepsRatesClosetoEachOther

Let’sassumethatthefederalfundsrateis4percentandtheinterestonreservesis4.5percent.Bankswillquicklyrealizethattheycanborrowfundsinthefederalfundsmarketat4percentanddepositthosefundsattheFedandearntheinterestonreserve

8Section19(b)(2)oftheFederalReserveActrequireseachdepositoryinstitutiontomaintainreservesagainstcertainliabilitiesofthebank.TheBoard’sRegulationD(ReserveRequirementsofDepositoryInstitutionsintitle12,part204,oftheCodeofFederalRegulations)implementsthereserverequirementsprovisionsinsection19.Eligibleinstitutionsincludedepositoryinstitutionsandcertainotherinstitutionsasspecifiedintheact;seethedefinitionin12C.F.R.§204.2at/current/title-12/chapter-II/subchapter-A/part-204/section-204.2#p-204.2(y).

9OnOctober6,2008,theFedstartedtopayinterestonreservesofeligibleinstitutionswithmasteraccountsatFederalReserveBanks.UptoandincludingJuly28,2021,interestwaspaidonrequiredreservesatanIORR(interestonrequiredreserves)rateandatanIOER(interestonexcessreserves)rate.TheIORRratewaspaidonbalancesmaintainedtosatisfyreservebalancerequirements,andtheIOERratewaspaidonexcessbalances.EffectiveMarch24,2020,theBoardamendedRegulationDtosetallreserverequirementratiosfortransactionaccountsto0percent,eliminatingallreserverequirements.Asaresult,thereisnolongeraneedtodescribeinterestratesbasedonwhetherthebalancesatisfiesareservebalancerequirement.Toaccountforthosechanges,theBoardapprovedafinalruleamendingRegulationDtoreplacereferencestoanIORRrateandtoanIOERratewithreferencestoasingleIORBrate.

10Thisideaiscalledthelawofoneprice,anditassumesthatmarketsarecompetitive—thatis,investorscannotmanipulatepricestotheiradvantage—andtheabsenceoftraderestrictionsandtradingcosts.

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balancesrateof4.5percent,whichmeansthattheycanearnaprofitof0.5percent(thedifferencebetweenthetworates).11Thisrisklessinvestmentstrategyiscalledanarbitrageopportunity.Aslongasthisarbitrageopportunityexists,bankswillborrowfundsinthefederalfundsmarketanddepositthosefundsattheFed,puttingupwardpressureonthefederalfundsrate.Thisupwardpressurewillcontinueuntilthefederalfundsraterisestoalevelclosetotheinterestonreservesandthearbitrageopportunitynolongerexists.

Asimilarlogicapplieswhenthefederalfundsrateismuchhigherthantheinterestonreserves.12Ifthisisthecase,bankscanmakemoneybywithdrawingfundsfromtheir“checkingaccount”attheFedandlendingthatmoneyatthehigherfederalfundsrate.Morebankswillingtolendmoneyinthefederalfundsmarketwillputdownwardpressureonthefederalfundsrate,causingthefederalfundsratetodeclinetowardtheinterestrateonreserves.

ImplementationTool3:OvernightReverseRepurchaseAgreement

Sofar,IhavetalkedabouttwooftheFed’sadministeredrates;thediscountrate,andtheinterestonreservebalancesrate.Now,Iwilltalkaboutthethirdkeyadministeredrate,theovernightreverserepurchaseagreementratedenotedbyONRRPinfigure2.Notallinstitutionsthatlendmoneyinthefederalfundsmarketandwhoarekeyplayersinshort-termmoneymarketsareeligibletoreceiveinterestonreserves.Consider,forexample,FederalHomeLoanBanks.Theyweresetupinthe1930stosupportmortgagelending.Today,theymanageabout$1.5trillioninassets.Theyare

11Thisprofitcalculationassumesoperationalandregulatorycostsarezero.

12Forthearbitragestrategiesdescribedearliertowork,thesystemneedstohavesufficientreservesandenoughcompetitionamongbanks.

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majorlendersinthefederalfundsmarket,buttheyareineligibletoreceiveinterestonreserves.Therefore,theymayhaveanincentivetolendfundsatamuchlowerratethantheinterestrateonreservesratherthanearnzerointerestonidlecashbalances.Toensurethattheseandotherinstitutionsdonotchargeaninterestratemuchlowerthantheinterestrateonreserves,theFedusesanovernightreverserepurchaseagreementfacilityasasupplementarypolicytooltohelpcontrolthefederalfundsrate.13

Thisfacilityisopentoabroadsetoffinancialinstitutions,includingmoneymarketfunds(MMFs),government-sponsoredenterprises,andbanksthatareactiveinfinancialmarketswhereshort-terminterestratesaredetermined.Atthisfacility,institutionsagreetobuyaTreasurysecurityfromtheFedandsellitbackthenextday.Inreturn,theFedpaystheinstitutiontheovernightreverserepurchaserate.14Eventhoughthistransactionseemscomplicated,itissimilartobanksdepositingreservesattheFedandreceivinginterestonthem.Thistransaction,illustratedonslide5,isequivalenttofinancialinstitutionsdepositingcashattheFedandtheFedgivingthemaTreasurysecurityascollateral,payingthemtheovernightreverserepurchaserateonthedeposit,andagreeingtobuybackthesecuritythenextday.

Thisfacilitysetsafloorforthefederalfundsratebecausenotonlybanks,butotherfinancialinstitutionscanalwaysearntheovernightreverserepurchaseagreement

13TheFedintroducedtheONRRPfacilityinSeptember2013andconductedtestoperationsthroughlate

2015.InSeptember2014,theFOMCindicatedthatitintendedtousethefacilityasneededtohelpcontrolthefederalfundsrate.Formoreinformation,seeBoardofGovernors(2018)andFederalReserveBankofNewYork(2023).

14Theinterestratethatacounterpartyreceivesisthefacility’sofferingrateexceptinthehighlyunlikelyeventthattheamountofpropositionstheFedreceivesexceedstheamountofsecuritiesavailablefortheoperation.Inthatcase,theinterestratewouldbedeterminedbyanauctionprocessconductedbytheFederalReserveBankofNewYork,asdescribedinFederalReserveBankofNewYork(2023).

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ratewhenlendingmoneytotheFed.15Inotherwords,theinterestrateatthisfacilityservesasareservationrate,orthelowestratelendersarewillingtoacceptforlendingouttheircash.

AmpleReserves

AsImentionedearlier,thefederalfundsrateisdeterminedbyborrowersandlenders.Infigure3,itisthepointwheresupplyanddemandintersect.Inthisfigure,noticethatthesupplycurveisofftotherightanditintersectstheflatpartofthedemandcurve.Thisisonpurposebecausewearecurrentlyinwhatwecallanample-reservesenvironment.16Inthisenvironment,theFedissupplyingan“ample”levelofreservestothebankingsystem,andsmallmovementsinthesupplycurvewillnotaffecttheequilibriumfederalfundsratemuch.Instead,asImentionedearlier,thekeytooltheFedusestoimplementmonetarypolicyistheinterestrateonreservesbalances.Infigure3,youcanseethatbymovingtheinterestrateonreservesdown,theFedshiftsthedemandforreservesdownandaffectsthefederalfundsrateevenifthedemandcurveisflat.17Asimilarmechanismfollowsbymovingtherateup.Assuggestedbythegraph,theFOMC

15ForbankseligibletoreceivetheIORBrate,theIORBrateistheirreservationrate,anditexplainswhythefederalfundsmarketiscurrentlydominatedbynonbanklenderswiththeEFFRremainingbelowtheIORBrate.

16InJanuary2019,theFedannouncedthat“theCommitteeintendstocontinuetoimplementmonetarypolicyinaregimeinwhichanamplesupplyofreservesensuresthatcontroloverthelevelofthefederalfundsrateandothershort-terminterestratesisexercisedprimarilythroughthesettingoftheFederalReserve’sadministeredrates,andinwhichactivemanagementofthesupplyofreservesisnotrequired.”SeeBoardofGovernors(2019a,para2).Afonsoandothers(2022),amongothers,investigatehowtoidentifyample-reservesregimes.

17Inperiodswhenreservesareample,theremightbeanincreaseinovernightreverserepurchaseactivityfollowinganincreaseinreservesupplybecausenonbankfinancialinstitutionsabsorbliquiditythatbanksfindcostlytoholdontheirbalancesheetbecauseofregulatorycapitalrules.IfaprimeMMFlendsmoneytoabankinthefederalfundsmarketinsteadoflendingitmoneyintheONRRPfacility,thebankincreasesitsliabilities(borrowingfromtheprimeMMF)andassets(reserves),whichexpandsitsbalancesheet.Itwillaffectthebanks’variousregulatoryratiosandcounttowardcalculatingtheFederalDepositInsuranceCorporationfee.

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ismindfulaboutadjustingitsotheradministeredratesinsyncwiththeinterestrateonreservebalances.Thispracticehelpsensurearbitrageworkstoshiftthedemandcurveasindicated.

ImplementationTool4:OpenMarketOperations

Sofar,IhavetalkedabouthowtheFedinfluencesthedemandcurvebychangingitsadministeredrates.Now,IwilltalkabouthowtheFedshiftsthesupplyofreservesinthesystem.Itdoessobybuyingorsellingsecurities,so-calledopenmarketoperations.WhentheFedpurchasessecurities,itpaysforthembydepositingcashintotheappropriatebanks’reservebalanceaccounts,addingtotheoveralllevelofreserves(cash)inthebankingsystem.

Before2008,openmarketoperationsweretheFed’sprimarymonetarypolicytoolbecausetherewerelimitedreservesinthebankingsystem,aso-calledscarce-reservesregime.Inascarce-reservesenvironment,thesupplycurveintersectsthedemandcurveonthedownward-slopingpartofthedemandcurve,asillustratedintheleftpaneloffigure4.Openmarketoperationsarethetoololdtextbooksemphasize.TheFedwouldinjectordrainreservesthroughopenmarketoperationstokeeptheverticalsupplycurveatthedesiredlocation—whereitintersectsthedemandcurveattheintendedfederalfundsrate.Sincethesupplyofreservesnaturallychanges—forexample,becauseofthewithdrawalofreservesintophysicalcurrency—theFedconductedtheseoperationsfrequently.Today,beinginanample-reservesregime,theFedoperatesonadifferentsegmentofthedemandcurveandusesdifferenttools,asillustratedintherightpaneloffigure4.

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TechnicalAdjustmentstotheSupplyofReserves:ACaseStudy

Althoughactivemanagementofthesupplyofreservesisnot,bydesign,afeatureofanample-reservesregime,therearetimeswhentheFedmaytakestepstoadjustthesupplyofreservestosupportinterestratecontrol.Forexample,inmid-September2019,strainsinfundingmarketsemergedasquarterlycorporatetaxpaymentsandthesettlementofTreasurysecuritiescoincidedandresultedinalargeamountofcashbeingdrainedfromshort-terminterestrateinvestments.Infact,reservebalancesfellmorethan$100billionoverjusttwodays.Althoughthedraininreservesassociatedwithseasonaltaxpaymentswasexpectedtoputsomeupwardpressureonshort-terminterestrates,theincreasesinratesthatmaterializedwereexceptionallylargebyhistoricalstandards.OnesuchinterestrateistheSecuredOvernightFinancingRate,abroadmeasureofthecostofborrowingcashovernightcollateralizedbyTreasurysecurities.Asshowninfigure5,thebluedashedlinedenotedasSOFRspiked,andtheeffectivefederalfundsrate,theredsolidline,moved5basispointsabovethetargetrangeduringthisepisode.

InresponsetothesemarketdevelopmentstheFedundertookopenmarketoperationstopurchasesecuritiestoaddreservestemporarily.Specifically,theFedconductedrepurchaseagreement(repo)transactionstoprovideimmediateliquiditytothemarketandhelpalleviatethefundingstrains,ensuringthefederalfundsrateresumedtradingwithinthetargetrange.Inaddition,theFOMCjudgedthattheprevailinglevelofreservesupplyatthattimemayhavebeenabittoolowtobeconsistentwithoperatinginanample-reservesregime.Accordingly,inearlyOctober2019,theFOMCdirectedthe

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Fedtomaintainovertimereservebalancesatleastaslargeasthelevelthathadprevailedin“earlySeptember,”atimewhentherewerenoevidentpressuresinmoneymarkets.18

TheFed’sBalanceSheet

TheFed’sbalancesheetcontainsagreatdealofinformationaboutthescaleandscopeofitsopenmarketoperations.Figure6showstheevolutionoftheFed’sbalancesheet,wheretheholdingsofU.S.Treasurysecurities,agencymortgage-backedsecurities(MBS),andothersecuritiesarerecordedasassetsandreservebalancesarerecordedasliabilities.BothseriesaredividedbygrossdomesticproductbecausetheFed’sbalancesheetshouldnaturallyincreaseovertimewitheconomicgrowth.Weenteredtheample-reservesregimein2008,duringthe2007–09financialcrisis,astheFedsharplyincreaseditstotalassets.In2020,duringtheCOVID-19pandemic,therewasanothersharpincreaseintotalassets.Inbothinstances,theFedreduceditsinterestratetargetnearzeroandpurchasedsecurities,injectingreservesintothebankingsystem.Theeffectofpurchasingsecuritieswastoreducelonger-terminterestratestosupporttheeconomy.TheexpansionoftheFed’sbalancesheetispopularlyknownasquantitativeeasing(QE).WhenQEended,theFedreinvestedanymaturingsecuritiesitheldtomaintainthesizeofthebalancesheet.Now,theFedisfightinginflationbyraisingitsinterestratetargetrangeandisintheprocessofshrinkingtheFed’sbalancesheet,whichisreferredtoasquantitativetightening(QT),bypassivelystoppingthereinvestmentinsomematuringTreasurysecuritiesandagencymortgage-backedsecurities(MBS).19

18Formoredetailsonthisevent,pleaseseeIhrig,Senyuz,andWeinbach(2020)andBoardofGovernors(2019b,para.2).

19Lopez-SalidoandVissing-Jorgensen(2023)provideaframeworkforunderstandingbanks’demandforcentralbankreservesandassesshowmuchQTisfeasibletomaintainanample-reservesenvironment.

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SummaryofTools

I’vetalkedabouthowtheFedhasfourtoolsinitstoolboxtoimplementmonetarypolicy.Threeofthetoolsandtheirassociatedadministeredrates,showningreentextonslide10,areusedtosteerthemarket-determinedfederalfundsrateintotheFOMC’stargetrange.Thesetoolsalsointeractwithothershort-termmarketinterestratesthrougharbitragerelationships.Thefourthtool,showninbluetext,isopenmarketoperations—thepurchaseandsaleofgovernmentsecurities—whichisusedtoadjustthesupplyofreservesinthebankingsystem.

MonetaryPolicyTransmission

NowthatyouunderstandtheFed’simplementationtools,let’sseehowtheFedusesthemtoachieveitstwomandatedgoals:maximumemploymentandpricestability.Currently,theunemploymentrateislow,andtheinflationrateisabovetheFed’s

2percenttarget.Beginninginthesecondhalfof2021,asthemagnitudeandpersistenceoftheincreaseininflationbecameclearerandasthejobmarketrecoveryaccelerated,theFOMCpivotedtowardatighterstanceofmonetarypolicy.InMarch2022,theFOMCincreaseditstargetrangeforthefederalfundsrate,forthefirsttimesincetheonsetofthepandemic.InJune2022,webegantheprocessofsignificantlyreducingthesizeofourbalancesheet,afterannouncingourplansinMay.

Monetarypolicyistransmittedtotherestoftheeconomybyaffectingfinancialmarketprices,suchaslong-terminterestrates,whichinturnaffectthedecisionsofhouseholdsandbusinesses.Previously,Idiscussedhowchangesinthefederalfundstargetrangearetransmittedtoshort-terminterestrates,suchastheovernightreversereporates,througharbitragerelationships.Short-terminterestrates,inturn,affectlong-term

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interestratesthroughinvestors’expectations.Morespecifically,accordingtotheexpectationstheoryofthetermstructureofinterestrates,intermediate-andlong-terminterestratesaretheweightedaverageofexpectedfutureshort-terminterestrates.20Inaddition,monetarypolicyaffectsriskpremiums.Tightermonetarypolicytendstoreducethewillingnessofinvestorstobearrisk,makingthemlesswillingtoinvestinlong-termassets,whichmeansthattheirreturn(interestrate)mustincreaseforinvestorstobuy