Risky asset prices such as equities have risen at a rapid pace, and credit spreads and measures of credit availability have continued to ease. These changes have been driven to a large extent by the improvement in the economic outlook and, in turn, will help to promote the economic recovery going forward. The decisions taken in the second half of 2010 affecting the size of the Federal Reserve’s portfolio have provided support to that process. To be sure, economic fundamentals will ultimately exert the strongest force on financial conditions, as can be seen by the rise in Treasury yields even as the Federal Reserve expanded its balance sheet. But the Federal Reserve’s balance sheet actions have helped to make broader financial conditions more accommodative. Characteristics of the SOMA portfolio The set of asset purchase programs launched by the Federal Reserve, including those initiated at the peak of the financial crisis and the more recent actions, have changed some of the basic characteristics of the SOMA portfolio. I thought it would be useful to review those changes and to discuss their implications for the conduct of monetary policy. The most obvious effect of the purchase programs has been on the size of the SOMA portfolio. If the intended asset purchases announced in November are completed, the size of the domestic portfolio will reach approximately $ trillion by mid-year – considerably larger than the $ trillion portfolio that would be in place in the absence of the asset purchase programs.
In recent years weak growth in import prices and rapid productivity growth have been such factors. On the other hand, it may also be the case, if inflation is high and held up by special factors for a fairly long period of time, that interest rates must be maintained at a high level even when economic activity is not so strong. This means that it is also very difficult in practice to determine what is a "normal” level for the policy rate. It is possible to use different methods to calculate an approximate interval for what can be regarded as a normal repo rate. However, this type of interval will of necessity be fairly broad – in a box in the June Inflation Report it was estimated at 3.5-5 per cent. Experiences also show that the repo rate can fall outside of this rather broad range for fairly long periods of time. Given this, it can be observed that estimates of the normal level for the repo rate have a fairly limited value when assessing interest rate developments in the near future and that interest rate decisions cannot be justified merely because the repo rate is deviating from a level regarded as normal. 1  See Monetary policy in Sweden”, Sveriges Riksbank, 2006 (can be downloaded as a file from the Riksbank's website, www.riksbank.com, or ordered in booklet form). 2  Memorandum “Riksbankens inflationsmål – förtydligande och utvärdering”, 4 February 1999, registration no.