This might lead to higher risk premia and higher nominal interest rates that would undermine the effectiveness of such a policy to stimulate the economy. In addition to communication strategies, the Federal Reserve has a second set of tools, namely the ability to expand its balance sheet to stimulate activity and move inflation toward desired levels – either by purchasing medium and long-term Treasuries or agency mortgagebacked securities. Such purchases of long-duration assets pull down the level of long-term interest rates by removing duration from private-sector hands, who respond by purchasing other long-dated assets. Two interesting questions pertain to balance sheet expansion: (1) How much would the Fed have to purchase to have a given impact on the level of long-term interest rates and economic activity, and, (2) what constraints exist in terms of limits to balance- sheet expansion, and what are the costs involved that could impede efforts to meet the dual mandate now or in the future? The questions demand serious consideration prior to any decision to expand the balance sheet further. With respect to the first question, some simple calculations based on recent experience suggest that $ billion of purchases would provide about as much stimulus as a reduction in the federal funds rate of between half a point and three quarters of a point. But this estimate is sensitive to how long market participants expected the Fed to hold on to these assets.
That’s why the FSB is now developing new policies to address liquidity, leverage and securities financing risks in asset management activities. These measures will help ensure asset managers can provide sustainable and reliable financing to EMDEs. That’s why the FSB is working to ensure the central counterparties that support the plumbing of the new system are resilient and can be resolved without disruption to the flow of financing to the real economy. And that’s why FSB members are working to develop more effective macro prudential policies. These will dampen the impact of capital flows on domestic vulnerabilities and allow countries to be more open and connected to global trade and investment. The FSB’s work plan is highly complementary to other G20 priorities in infrastructure, inclusiveness and climate change. A FAIR system is essential if we are to move to a 2 degree world. A FAIR system is critical to achieving the economic and moral imperatives of the SDGs. I look forward to our discussion of how to build such a system to the benefit of all. 15  BIS International Debt Statistics, (all sectors, nationality basis). 16  IMF World Economic Outlook data show that average annual portfolio flows to EMDEs have more than tripled from their average in the decade prior to the crisis to an average of $ billion annually between 2009 and 2015. BIS central bankers’ speeches  5