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The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period. Indeed, estimates from a macroeconomic model suggest that such interest rate forward guidance probably has greater effects than signals about the amount of assets purchased.

With the Federal Reserve’s benchmark federal funds rate near zero since late 2008, the central bank has used alternative tools to stimulate the economy. In particular, the Fed has purchased large quantities of long-term Treasury and mortgage-backed securities, a policy often referred to as quantitative easing. It has also provided more information about the probable future path of the short-term interest rate, a policy known as forward guidance. This Economic Letter uses a macroeconomic model to examine the effects of quantitative easing and forward guidance on growth and inflation.