Unconventional monetary policy is often called “quantitative easing” because its effect is felt through the quantity rather than the cost of credit.
Will these tactics work? In an exhaustive study of unconventional monetary-policy options in 2000, five Fed staff economists concluded, “These tools have their limitations, and there is considerable uncertainty regarding their likely effectiveness.”
The Fed seems to believe its actions matter more for psychology than in influencing the supply of and demand for long-term debt. A senior official says the Fed is not explicitly attempting to lower long-term rates; instead it wants to narrow the unusually wide spread between yields on MBSs and Treasuries. By reassuring investors that a committed buyer is in the market, it hopes to reduce the illiquidity premium pushing yields up.
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