It initially relied on outside investment advisors to support its first purchase program, before eventually bringing trading operations in house, and then later developing capabilities to conduct auctions on its proprietary auction platform.44  Conclusion The Federal Reserve and other central banks initially proceeded with asset purchases in a cautious way given that the tool was new. However, I believe we have learned that the benefits are notable and the costs likely less than feared. Moreover, U.S. fixed income markets were able to withstand more sizable purchase operations than we initially anticipated, and we now know that we can successfully maintain interest rate control with a large balance sheet as we raise rates. This experience could give policymakers greater confidence in using this tool to provide additional monetary policy accommodation in future zero lower bound episodes, and give market participants greater confidence in the effectiveness of the tool in mitigating the zero lower bound. With evidence suggesting the neutral fed funds rate has fallen notably, we should continue to absorb lessons from our and other central banks’ experiences. In particular, we will need to consider the importance of communications, how to organize an operating regime that transitions smoothly, and how to maintain operational readiness. As we normalize the Federal Reserve’s balance sheet, we continue to proceed cautiously given our lack of experience with this process.
1, Spring 2003. 34 Such communications are a form of Odyssean forward guidance about the balance sheet. See Jeffrey R.  Campbell et al, “Macroeconomic Effects of Federal Reserve Forward Guidance, ” Brookings Papers on Economic Activity, Spring 2012. The authors distinguish between central bank forward guidance that simply forecasts macroeconomic performance and likely monetary policy actions (Delphic guidance), and guidance that publicly commits the central bank to a set of future actions (Odyssean guidance). 35 Because market prices are forward-looking, an announcement that affects expectations about the stock of  assets held by the Fed should have an immediate impact on market prices. However, the overall size of the market impact will depend on the expected path of portfolio holdings over time. In addition, completion of purchases may be perceived as strengthening the central bank’s commitment by making it more difficult to deviate from announced plans. 36 However, since term premium effects decay as securities age, selling securities with relatively short remaining  times to maturity may not be materially different than redeeming those securities. 37 The Fed’s first two purchase programs were launched with pre-announced sizes and time frames (although the  first program was later expanded). In contrast, the third program was open-ended and state-contingent.