BIS central bankers’ speeches  3  which maintains the size of the portfolio and adjusts the asset type and maturity composition of its holdings. 8 Large-scale asset purchases as a policy tool and their execution Of course, as this audience knows well, the Federal Reserve was not the first major central bank to use alternative tools for monetary policy implementation at the zero lower bound. The quantitative easing policy (QEP) that the Bank of Japan (BoJ) initiated to combat deflation in 2001, after operating for some time under a policy of zero interest rates, provided a valuable precedent when central bankers elsewhere faced similar challenges later that decade. However, the balance sheet expansion under the BoJ’s original quantitative easing differed significantly from the asset purchase programs undertaken by advanced economy central banks over recent years, including the BoJ’s current quantitative and qualitative monetary easing (QQE). The earlier QEP was a liability-driven program in which the BoJ changed its operating objective from an overnight interest rate to quantitative targets for the level of current account balances outstanding at the BoJ (the counterpart to reserve balances held by depository institutions at the Fed). To achieve its new target, the BoJ provided ample liquidity through a range of operations. Although the BoJ increased its outright purchases of long-term government bonds as part of this initiative, a large share of the easing was accomplished through temporary open market operations or purchases of short-term securities.
Last week, the FOMC directed the Desk to reduce purchases of Treasury securities to $ billion per month and purchases of agency MBS to $ billion per month starting in October. The Committee also indicated that it will end the current purchase program at its next meeting if incoming information broadly supports its expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. It also directed the Desk to maintain its agency MBS and Treasury security reinvestment policies – activities it separately announced it expects to continue after it begins to increase its target range for the federal funds rate. Should this course come to pass, the domestic securities portfolio will peak at a par value of about $ trillion – more than a five-fold increase since the start of the financial crisis in August 2007. The composition of the portfolio will also remain more complex. Formerly composed entirely of Treasury securities, the domestic portfolio is now only 60 percent Treasury securities, with the remainder held in agency MBS (and a small amount of agency debt securities). As I noted earlier, the weighted average maturity of the Treasury portfolio has lengthened substantially, while the MEP essentially eliminated the portfolio’s holdings of any Treasury securities maturing prior to February 2016. Meanwhile, it’s hard to predict the exact pace at which the SOMA portfolio’s agency MBS holdings will pay down over time given the prepayment uncertainty associated with those securities.