[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.

Rosengren, a voting member of the Fed’s policymaking Federal Open Market Committee, said in an interview with Market News International that he will go into the Nov. 2-3 meeting with an “open mind” about whether or not the Fed should inject more monetary stimulus into the economy.

However, he made clear that he would favor a resumption of quantitative easing if the economy does not show improvement on both unemployment and inflation. Further deterioration is not necessary to justify Q.E. in his mind.

Rosengren was more dubious about the merits of changing the Fed’s communication strategy to raise inflation expectations and lower rates, saying he doesn’t perceive there to be a communication problem with the market. He was also skeptical as to whether cutting the already  bare-bones interest rate on excess reserves would accomplish much.

Were deflationary expectations to materialize — and let me repeat, I do not see much risk of this — I would support appropriate steps to raise expectations of inflation, including, perhaps, aggressive asset purchases coupled with clear communication that our goal is to combat deflationary expectations. But for such a strategy to be successful, the public must believe that the Fed can and will act to combat those expectations. The Fed must be credible. Protecting that credibility is why, based on my current outlook, I do not support further asset purchases of any size at this time. As I said earlier, asset purchases in our current economic environment can do little if anything to speed up the return to full employment. But if the public believes that they can and is disappointed, it may have less confidence that the Fed will act to raise inflationary expectations if needed. Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time.

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.

I see QE as affecting the economy in four main ways. I’ll first discuss them from a theoretical perspective and then discuss what’s known about these effects empirically.

The first effect of QE is that it represents another form of forward guidance about the path of the fed funds rate. It is a way for the FOMC to signal—in a perhaps more striking way—that it plans to keep the fed funds rate low for an even longer time to come.

Second, QE creates more reserves in banks’ accounts with the Fed. The standard intuition is that this kind of reserve creation is inflationary... This basic logic isn’t valid in current circumstances, because reserves are paying interest equal to comparable market interest rates...

The third effect of QE is the one that is usually stressed: It reduces the exposure of the private sector to interest rate risk... All long-term yields fall, and so firms should be more willing to undertake long-term capital expansions or hire permanent employees.

The fourth effect of QE is less widely discussed. The Fed cannot literally eliminate the exposure of the economy to the risk of fluctuations in the real interest rate. It can only shift that risk among people in the economy. So, where did that risk go when the Fed bought the long-term bond? The answer is to taxpayers...

If action is taken by the Fed, a clear option is to grow the size of the balance sheet since the policy interest rate, for all practical purposes, cannot go any lower. Growth of the balance sheet would be accomplished by a second round of asset purchases (probably Treasury bills and notes) paid for by newly created money.

I have some concerns that holding securities with risky payoffs on the Fed’s balance sheet creates the potential for moral hazard. If market participants believe that the Fed is immune to the poor payoffs from these assets and the Fed’s plans for these assets is not clear, the economics of moral hazard suggest that the central bank may have incentives to take on excessive risks at the expense of taxpayers.

"I think the FOMC did make a move to position itself to be able to act if necessary, to take more action, more easing type action.” He added, “The purchase of longer-dated Treasurys is the most promising action we can take.”

“If the Fed does take more action, I do not think it should be a shock and awe kind of move,” Bullard said. He instead prefers a more incremental approach to buying Treasurys that could tack with incoming data.

To not trigger [additional measures from the Fed like resuming purchases of government securities], I would want to see that there was the prospect of progress in the forecast toward achieving both much higher levels of employment and, eventually, higher inflation, closer to my 2 percent target...

“To have a substantial effect, people would have to anticipate substantial purchases,” Mr. Kohn said. “Does the Federal Reserve need to announce it’s buying $1 trillion? Not necessarily. If the Fed said, ‘We’re buying a smaller amount now, but we’ll continue to watch the situation and if it warrants, we’ll buy more,’ that sort of thing would give the public and the markets a sense that someone was out there, ready to buy if the economic situation weakened further or didn’t improve.”

...[A] small precautionary action to avoid any risk associated with inadvertent tightening was prudent, in my view, in the midst of disappointing economic indicators.

That is how I interpret the decision announced following the August meeting—a small tactical change designed to preserve the level of liquidity provided to the system. I supported the committee's decision, but I do not view it as a fundamental change of outlook or strategy. I do not believe this change necessarily heralds the beginning of a period of further expansion of the Fed's balance sheet. Nor do I think the decision precludes a return to a policy of allowing the balance sheet to shrink on its own.

I think the decision has been over-interpreted in some quarters. These interpretations, along with alarmist commentary about deflation and a double-dip recession, are feeding an exaggerated sense of foreboding.

 The channels through which the Fed's purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

Policy actions should be commensurate with the risks that the economy faces. A series of smaller policy actions can add up to a large action, but only if incoming data suggest that as the appropriate course... Purchase size should be in proportion to the size of any deterioration in the outlook.

[The Federal Open Market Committee’s move to reinvest proceeds from mortgage-backed securities into Treasuries] had a larger impact on financial markets than I would have anticipated... My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted.

Before this week’s FOMC meeting, The Wall Street Journal wrote that the Fed would add more stimulus into the economy—including the purchase of long-term treasuries. It turns out that reporter was remarkably prescient.

There's nothing that says -- if the economy weakens and the issue is housing and mortgage rates there's nothing that says we couldn't resume those {MBS} purchases if necessary and we'll certainly keep that option open. But, again, at this point the main effect seems to be that we're still holding $1.4 trillion in agency, MBS and debt and that amount being taken off the market seems to be having the ongoing effect of keeping mortgage rates pretty low.