Dudley, William C. on 2018 February 23

Concluding that LSAPs are less powerful than suggested by some of the estimates from the event study literature does not imply that there is no role for LSAPs at the zero lower bound... [D]iscarding such a tool or ruling out its use seems counterproductive for two reasons. First, to the extent that such a tool can provide accommodation, ruling out its use would raise the risks of insufficient monetary policy accommodation when interest rates are pinned at the zero lower bound. Second, expectations matter. If households and businesses believe that the Fed has run out of tools to provide monetary policy accommodation or is unwilling to use certain tools for that purpose, the risk of inflation expectations becoming unanchored to the downside would increase, which would make it even more difficult for the central bank to achieve its goals. For these reasons, LSAPs should be viewed as a viable tool in our arsenal to be used when the zero lower bound is a relevant policy concern

Dudley, William C.

U.S. Monetary Policy Forum

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