And so there was a lot of talk about -- about double dip and that kind of thing. So we felt that we needed to take some action.

In terms of the $600 billion, we have tried through a number of methods to establish a correspondence between these purchases and what our normal interest rate policies would be.

And a rule of thumb is that $150 billion to $200 billion in purchases seems to be roughly equivalent to a 25 basis point cut in the federal funds rate in terms of the stimulative power for the economy.

And so $600 billion is roughly a 75 basis point cut in the policy rate, in terms of its broad impact.

Seventy-five basis points in normal times would be considered a very strong statement, a powerful move, but not one outside of the range of historical experience. It would be one that would be taken at a period of concern and then we would observe the effects. So that was roughly the analysis that we did.

From the Q&A session

We asked the hypothetical question: If we could lower the federal funds rate, how much would we lower it? And a powerful monetary policy action in normal times would be about a 75-basis-point cut in the federal funds rate. We estimate that the impact on the whole structure of interest rates from 600 billion (dollars) is roughly equivalent to a 75-basis- point cut. So on that criterion, it seemed that that was about enough to be a significant boost, but not one that was excessive.

I've said this and I'll say it to you again: QE2 was not going to be a big mover of markets or of interest rates. And so it--you could easily imagine that whatever effect it's having is getting lost in the waves of other economic developments that are taking place.

There's this very nice paper by Gagnon and some other people from around the system that estimated the impact of the first LSAP to be around 40 to 80 basis points on 10-year yields. This is 40 to 80 basis points out of $1.5 trillion. We did $600 billion. That's something like 16 to 30 basis points now. That's pretty small.

Another thing that happened is, rightly or wrongly, markets have downsized their expectations of what our eventual purchases might be. I say rightly or wrongly because I have no idea. I don't know if that's right or wrong in terms of what will actually transpire. But I think that some of the reaction that the Fed received--the negative feedback--I think, has led markets to downsize their expectations.

And so our view of how this is supposed to work is it's not just our announcement of $600 billion at stake. It's what do markets expect our eventual stock purchases to be. And that has come down.

I think it was a move in the right direction. Its effect was going to be small.

I am still somewhat skeptical that we will see much of a stimulative effect from the new round of purchases. The Fed’s first purchase program worked to lower interest rates, although estimates vary quite a lot. Some studies suggest that the effect was 30 to 60 basis points. Others found a much smaller impact. Yet, these purchases were done at a time when financial markets were highly disrupted and asset risk premiums were extremely elevated. But markets are no longer disrupted, so we cannot expect the same effect this time. Even if we did, it is not clear to me that a further reduction in long-term interest rates will do much to speed up the reduction in the unemployment rate to more acceptable levels.

I am still somewhat skeptical that we will see much of a stimulative effect from the new round of purchases. The Fed’s first purchase program worked to lower interest rates, although estimates vary quite a lot. Some studies suggest that the effect was 30 to 60 basis points. Others found a much smaller impact. Yet, these purchases were done at a time when financial markets were highly disrupted and asset risk premiums were extremely elevated. But markets are no longer disrupted, so we cannot expect the same effect this time. Even if we did, it is not clear to me that a further reduction in long-term interest rates will do much to speed up the reduction in the unemployment rate to more acceptable levels.

I believe that QE is a move in the right direction. However, as I have discussed on earlier occasions, I also think there are good reasons to suspect that the ultimate effects of any amount of QE are likely to be relatively modest. That’s why I would have greatly preferred for the committee to have been able to cut its target rate rather than using QE. The problem is that its target rate is already essentially at zero, and so it was not possible to cut the target rate any further.

While such estimates are by nature quite uncertain, we estimate that the impact could be a reduction in the unemployment rate by the end of 2012 of a little less than half a percent. This would translate into more than 700,000 additional jobs that we would not have had in the absence of this monetary policy action.

In additional comments to Bloomberg News, Rosenberg said:

"Given my forecast, I fully anticipate we will purchase the entire amount. Certainly if the economy were to weaken substantially and further disinflation were to occur, we should take more action," and officials could also make "adjustments" if the economy turned out to be much stronger than expected.

I think it's important that we be measured in our expectations about how much further stimulus can accomplish in the current environment. I don't have outsized expectations. I see it as a precaution aimed at reducing or eliminating downsides. Further, in terms of near-term economic activity, I see the additional asset purchases as buttressing the ongoing effects of policies that have already been put in place. I expect it should have some incremental positive effect on overall demand. Also, it should reinforce, and accelerate somewhat, the growth momentum that is currently evident and, in my opinion, counter to some extent the strong headwinds the economy is facing.

According to Bloomberg News: 

Lockhart told reporters after the speech that his "working assumption is that the Fed "will in all probability complete the program in the eight months it's been designed for."

"we will be reviewing it at essentially ever FOMC meeting," he said.  "I wouldn't totally eliminate the possibility that there will be a mid-course change in direction".

Easing of monetary policy produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months and can be difficult to disentangle.

It doesn't make sense to do a small portion of QE... It has to be enough to make a difference. Something along the lines of $100 billion a month would be in range.

My conclusion from [the work of Gagnon, Raskin, Remache, and Sack] is that the [2009 and early-2010] LSAP reduced the term premium on 10-year Treasury bonds relative to 2-year Treasury bonds by about 40-80 basis points (on an annualized basis). This fall in term premia led to a slightly smaller fall in the term premia of corporate bonds.

These estimates are extremely useful benchmarks. My own guess is that further uses of QE would have a more muted effect on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.

Some research studies have estimated that the effects of the earlier expansion of our securities holdings by just over $1.5 trillion lowered longer-term Treasury yields by about 50 basis points through this portfolio balance channel.  These effects on Treasury yields appear to have been transmitted into lower rates on private credit instruments and higher asset prices more broadly.

...

If the market were to begin having trouble digesting that prepayment risk, the spread between MBS rates and Treasury yields could widen. A significant widening of MBS spreads to Treasuries, whether due to this or other factors, could affect policymakers’ decisions about which assets to purchase. The Chairman’s speech in Jackson Hole and the August FOMC minutes both indicated that reinvesting in MBS rather than Treasury securities might become desirable if market conditions were to change.

[S]ome simple calculations based on recent experience suggest that $500 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.

I think that the best empirical work on the question of how the LSAP affected long-term Treasury yields has been done by Gagnon, Raskin, Remache, and Sack (2010). Their paper is a thorough investigation of this key issue.  My conclusion from their work is that the LSAP reduced the term premium on 10-year Treasury bonds relative to 2-year Treasury bonds by about 40-80 basis points (on an annualized basis). (The term premium is a measure of the difference in yields that is not explained by the expected path of short-term interest rates.) This fall in term premia led to a slightly smaller fall in the term premia of corporate bonds.

...

My own guess is that further uses of quantitative easing would have a more muted effect [than that of earlier action] on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.