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The Evolving State of the Fed’s Security Holdings	July, 2012		John Lindner; Bill Bednar; John B Carlson;	Economic Trends
	Abstract: Prior to the financial crisis, the Fed’s security holdings were restricted to a mix of Treasury securities, which consisted of a combination of short-term bills and longer-term notes and bonds. At the start of the crisis, the balance of Treasury bills fell. This dip turned out to be the beginning of a major evolution in the composition of the Fed’s portfolio. As a result of the crisis, the Fed’s security holdings have been completely transformed.
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A Quick Look at Fed Forecasting	June, 2012		John Lindner; Todd E Clark;	Economic Trends
	Abstract: During the Chairman’s recent press conferences, the first topic that he addressed was the Federal Open Market Committee’s (FOMC) set of economic projections. He outlined the Committee’s expectations for economic growth, inflation, and the unemployment rate for the next few years and the longer run. The numbers that he presented, however, offer only a snapshot of the Committee’s views.
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Monetary Policy and the FOMC’s Economic Projections	May, 2012		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: The Federal Reserve has further increased its transparency over the last couple of years. The inclusion of interest rate projections allows a rare opportunity to see whether a simple “guide post” might accurately describe participants’ views on appropriate policy. Monetary policy is frequently discussed in terms of guideposts, and often these are presented in the form of Taylor-type rules.
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Slow Employment Recoveries, Monetary Policy, and Expected Inflation	April, 2012		John Lindner; John B Carlson;	Economic Trends
	Abstract: Since the early 1990s, employment growth has been persistently slow coming out of recessions. This phenomenon, often described as a “jobless” recovery, has become increasingly severe over the past two decades, posing new challenges for monetary policy. Achieving maximum employment, along with price stability, is one of the two policy objectives mandated by Congress for the Federal Reserve.
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European Liquidity Strains	March, 2012		John Lindner;	Economic Trends
	Abstract: After peaking last summer, the level of reserves held at the Federal Reserve has declined. Given the public’s concerns about elevated reserve levels and all the new tools the Fed has developed for managing reserves, it is important for policymakers to understand where those reserves have gone. A quick examination of the Fed’s balance sheet, and the Fed’s data on the balance sheets of commercial banks, confirms that the likely culprit was liquidity strains in Europe.
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Play by the (Taylor) Rules	February, 2012		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: The interest rate projections released after the January Federal Open Market Committee (FOMC) meeting were another step toward increased Fed transparency. In the projections, each member of the FOMC described how he or she would conduct interest rate policy, given economic conditions in January and how they expect conditions to develop going forward. However, connecting the dots between the future interest rate policy and the economic data still leaves room for interpretation. Can we ascertain some of the important variables that Committee members are implicitly responding to? Estimating a Taylor rule can help with the interpretation.
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More Transparency, But Not a Crystal Ball	January, 2012		John Lindner; John B Carlson;	Economic Trends
	Abstract: On January 3, the Fed released the minutes from the December Federal Open Market Committee (FOMC) meeting and revealed that it will begin publishing the Committee’s interest rate projections. The goal of this action is to provide more transparency in the policymaking process. However, there are limitations to the information these types of projections provide. Examining the experiences of some foreign central banks illustrates what conclusions might and might not be drawn from the new data.
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Central Bank Liquidity Swaps	December, 2011		John Lindner; Todd E Clark;	Economic Trends
	Abstract: Two weeks ago, the Federal Reserve took action to expand the capabilities of its liquidity swap lines with other central banks. These central bank swap lines were originally put in place at the beginning of the financial crisis in 2007, and since then they have been used periodically. A look back at how they were used during the crisis can help to explain why these recent actions were taken.
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Policy Innovations at the Zero Lower Bound	December, 2011		John Lindner; Todd E Clark;	Economic Trends
	Abstract: The late summer and early fall bore witness to two new innovations in monetary policy. The first was at the August Federal Open Market Committee (FOMC) meeting, when the Committee introduced a change to the statement released after meetings, which altered the projected path of the federal funds rate target. The second came in September, when the Committee opted to begin selling shorter-term Treasuries from the Fed’s portfolio and use the proceeds from those sales to purchase longer-term Treasury securities. Both of these innovative moves were intended to adjust interest rates, one through communications and one through balance sheet manipulations. Here’s a quick look at how they did and at what some of the consequences could be.
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Reducing the Federal Deficit: Approaches in Some Other Countries	2011-22		John Lindner; Daniel R Carroll;	Economic Commentary
	Abstract: The United States is not the first advanced modern economy to face a serious federal budget challenge. A number of countries have seen their debt rise to unacceptable levels in recent decades, and they have taken steps to rein it in. We explore the approaches that Canada and the United Kingdom have used. Though there are important differences in approaches and countries, we draw five useful lessons for the reforms that may be proposed in the U.S. as it addresses its fiscal challenges.
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The Shout with Operation Twist	October, 2011		John Lindner; John B Carlson;	Economic Trends
	Abstract: Much attention has been given to the Federal Open Market Committee’s September decision to extend the average maturity of its portfolio by selling short-term Treasury securities and purchasing longer-term Treasury securities. This policy action is commonly called operation twist since its intended effect is to lower long-term interest rates relative to short-term rates—that is, to twist the yield curve.
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Interest Rates Have Responded to the Fed’s New Language	September, 2011		John Lindner; Todd E Clark;	Economic Trends
	Abstract: At its August policy meeting, the Federal Reserve took the unprecedented step of establishing a specific future date for policy action given current economic conditions. The intention was to clearly communicate to the public that, in light of what is currently known about the economic outlook, the Federal Reserve expects to keep interest rates extremely low for longer than the public previously believed. A quick look at some of the market reaction to the August (FOMC) statement shows that the change in statement language was successful in altering public expectations of future interest rates and, in turn, current interest rates.
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The Impact of GDP Revisions on Taylor Rule Estimations	September, 2011		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: Along with July’s advanced estimate for second-quarter GDP, the annual revisions for previous GDP estimates were released. Revisions showed a dramatically lower path for GDP than had been previously estimated. In fact, after revisions, real GDP is now believed to still be below pre-recession levels. This deeper dip in GDP is a more accurate picture of the actual economic conditions experienced throughout the recession. We look at how these revisions could impact policy using what is known as the Taylor rule.
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A Subtle Shift in FOMC Policy	July, 2011		John Lindner; John B Carlson;	Economic Trends
	Abstract: The minutes of recent FOMC meetings show that at least some FOMC members have been considering the costs and benefits of an explicit inflation target as an official policy goal. Recent statements by Chairman Bernanke suggest that the Fed has very nearly adopted an unofficial inflation-targeting policy.
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Short-Term Interest Rate Markets	June, 2011		John Lindner; Todd E Clark;	Economic Trends
	Abstract: A series of events dating back to November 2010 has significantly affected the functioning of short-term funding markets and, in turn, interest rates. The effects of these events can be seen in the trends of not only the federal funds market, but also the repo, commercial paper, Libor, and Eurodollar markets. Collectively, these developments—some of them having nothing to do with monetary policy—have served to ease short-term financing terms. Eventually, when the Federal Reserve begins to raise the target for the federal funds rate, it will probably need to take account of the dynamics of these changes in short-term funding markets.
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Policymaking for the Future	June, 2011		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: It was one of the most highly anticipated events so far this year, and we are not talking about the royal wedding. Chairman Bernanke’s press conference at the end of April drew notice from bloggers, news sources, and ordinary citizens concerned about the economy. What the prepared remarks made clear is that monetary policy is largely a forward-looking process.
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Manufacturing Hours and Employment in the Recovery	June, 2011		John Lindner; Timothy Dunne; Kyle Fee;	Economic Trends
	Abstract: The labor market showed a bit of weakness in May, gaining only 54,000 jobs. This is well below the rate observed since the beginning of the year. The unemployment rate also ticked up by 0.1 percent to 9.1 percent. So will manufacturing lead the way out of the last recession?
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Potential Risks Associated with an Itchy Trigger Finger	May, 2011		John Lindner; John B Carlson;	Economic Trends
	Abstract: Recent comments on monetary policy have focused more and more on containing the inflationary risks posed by rising food and commodity prices. Certainly, there are economic concerns associated with the possibility of high levels of inflation, but there are still several risks to the nascent economic recovery that could make policy tightening a worrisome move in its own right. While there are no episodes in history that correspond directly to our current policy situation, some past experiences are worth reviewing.
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Fourth-Quarter GDP Growth and a Look Forward	April, 2011		John Lindner; Kenneth Beauchemin;	Economic Trends
	Abstract: The short-run outlook for GDP growth is clouded by a series of first-quarter shocks—severe winter storms and political unrest in the Middle East are examples—whose effects will be of uncertain size and duration. Supply shocks of these sorts partly manifest themselves as weaker labor productivity. Our rough estimates suggest productivity growth will be a lot lower than in the previous quarter and considerablly lower than trend.
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How Should We Measure Success?	March, 2011		John Lindner; Todd E Clark;	Economic Trends
	Abstract: In the nearly two and a half years since the onset of the financial crisis, the Fed has purchased over $2 trillion in long-term assets. Determining the effectiveness of such a policy is challenging for a number of reasons, including the lack of prior experience with this monetary policy tool. One approach is to examine changes in interest rates to assess how financial markets react to announcements related to and preceding policy decisions. A second approach is to look broadly at the overall effect that the purchases have had on macroeconomic conditions. This article uses both approaches to judge the effectiveness of the Federal Reserve’s large-scale asset purchases.
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The Execution of the AIG Exit Plan	January, 2011		John Lindner; John B Carlson;	Economic Trends
	Abstract: On January 14, American International Group (AIG), paid down the remaining balances on its loans at the New York Fed—removing the Fed from any direct exposure to AIG, and in accordance with a recapitalization plan announced on September 30, 2010. The way in which AIG exited from its assistance is worth a closer look.
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Commodity Prices and Investment in Structures	January, 2011		John Lindner; Kenneth Beauchemin;	Economic Trends
	Abstract: Nonresidential fixed investment in structures managed to (nearly) tread water in the third quarter, falling only 3.6 percent compared to a 13.5 percent drop over the previous four quarters. This is a curious development given that four of the five main sub-components fell at double-digit paces during the quarter, including the typically largest componont—commercial structures, which includes office buildings, health care facilities, retail space, amongst others.
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Inflation Swaps	December, 2010		John Lindner; Joseph G Haubrich;	Economic Trends
	Abstract: One way to find out what markets expect for future inflation is to look at the inflation swaps market. A look at the swaps market shows that five-year inflation expectations have declined steadily since the spring of this year, leading some experts to worry about the possibility of deflation. Since September, however, the trend has reversed, and expectations have moved back up into the 2 percent range.
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A Positive Trend for the Fed’s Exposure to AIG	November, 2010		John Lindner; John B Carlson;	Economic Trends
	Abstract: One of the key arrangements used to avoid the bankruptcy of American International Group (AIG) in the fall of 2008 was the creation of two special purpose vehicles (SPVs) named Maiden Lane II and Maiden Lane III. SPVs are subsidiary companies with an asset/liability structure and legal status that makes their obligations secure even if the parent company goes bankrupt. Of course, if the assets are not valued correctly, the SPVs may not be able to pay off any creditors. In the case of Maiden Lane II and III, the creditor is the Federal Reserve Bank of New York, which made the loans that were used to purchase assets from AIG subsidiaries and counterparties. Currently, the estimated values of those assets exceed the amounts of the respective loans that were extended. Interestingly, asset revaluations in conjunction with the cash flowing in from the assets have been sufficient to maintain both a steady pay down of the loans and a steady if not rising value of the portfolio. Because the New York Fed will share in any profits remaining after the loans are paid in full, the prospects for a positive return on its investment look very good at this point.
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The 2000s: A Slow Start to the 21st Century	October, 2010		John Lindner; Kenneth Beauchemin;	Economic Trends
	Abstract: The decline in GDP from the first quarter to the second quarter, a two percentage point drop from 3.7 percent to 1.7 percent, is particularly worrisome for many observers, as it may be signaling a loss of momentum in the recovery. Adding to the pessimism is an array of rather weak third-quarter indicators that point to further slowing. These expectations make for a fitting end to the growth disaster that was the decade of the 2000s.
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The Great Recession and its Impact on Different Industries	September, 2010		John Lindner; Murat Tasci;	Economic Trends
	Abstract: The recent recession, now called the Great Recession by many, had significant adverse effects on the labor market overall. Even though the recovery has apparently begun and output has been growing since the second quarter of 2009, payroll employment is still about 6 percent less than it was at its prerecession peak in December 2007. New jobs are being created, but at a relatively modest pace.
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Eurodollar Futures, Taylor Rules, and the Conduct of Future Monetary Policy	September, 2010		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: With interest rates at zero, traditional monetary policy won’t stimulate the economy or increase inflation, and monetary authorities must find alternative approaches. One policy option is to signal the future path of interest rates and persuade markets that rates will stay lower than they would have historically given similar economic conditions. Is the Fed’s extended period of time language signalling just that? We look at Taylor rules and expectations derived from Eurodollar futures to check out the potential stimulative effect of the Fed’s “extended period” language.
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Has the Beveridge Curve Shifted?	August, 2010		John Lindner; Murat Tasci;	Economic Trends
	Abstract: Has the Beveridge curve, an empirical relationship between job openings and unemployment, changed in a way that would indicate that the labor market’s longer-term adjustment process has been adversely impacted by the recession? It is too early to tell for sure, but the curve’s recent behavior looks very similar to that of previous recessions.
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W(h)ither the Fed's Balance Sheet?	2010-8		John Lindner; John B Carlson; Joseph G Haubrich;	Economic Commentary
	Abstract: The Federal Reserve balance sheet's size and composition have changed dramatically since September 2008. Federal Reserve policymakers have expressed their support for eventually shrinking the Fed's balance sheet and returning the composition of its securities portfolio to include only U.S. Treasury issues. Through the careful study of public Federal Open Market Committee documents, this Economic Commentary concisely explains some of the FOMC's decisions concerning an appropriate sequence of policy actions.
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Market Expectations for Policy Rates	June, 2010		John Lindner; John B Carlson;	Economic Trends
	Abstract: The recent financial turmoil in Europe has been associated with a general shift in market expectations about the future course of domestic and foreign monetary policy. Many market participants are now expecting the federal funds rate to remain near the 0–25 basis point range through the early part of 2011. Going forward, market anxieties will have to recede before forward rate curves can accurately portray policy expectations.
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Monetary Policy and an Extended Period of Time	May, 2010		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: The FOMC met on April 27 and 28 and, like at previous meetings, continued to assert that the “Committee will maintain the target range for the federal funds rate at 0 to ¼” for an “extended period.” Trying to figure out when the Committee should increase the funds rate is complex. But John Taylor in a seminal 1993 paper argued that a useful guidepost for conducting monetary policy can be given by a simple rule or strategy whereby the central bank sets the federal funds rate in response to two variables—inflation and deviations of output from potential output.
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Recent Firming in the Federal Funds Market	April, 2010		John Lindner; John B Carlson;	Economic Trends
	Abstract: The effective federal funds rate has been rising since the end of February 2010, reflecting a number of factors. Some of those factors are the revival of the Treasury’s Supplemental Financing Program, an increase in the Fed’s discount rate, collateral effects generated by new Treasury debt around the April tax deadline, and the tightening of credit lines by GSEs.
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Market Expectations for Monetary Policy in the U.S. and Europe	March, 2010		John Lindner; Timothy Bianco; Kent Cherny; Ben R Craig;	Economic Trends
	Abstract: On March 16, the Federal Open Market Committee released a statement saying it would hold the Federal Funds target rate at 0 to 1/4 percent, and that “low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Was the market surprised by anything in this statement?
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The Beginnings of Normalcy	February, 2010		John Lindner; Charles T Carlstrom;	Economic Trends
	Abstract: The Federal Reserve announced a reduction in its primary credit rate (often called the discount rate) yesterday, as part of its ongoing normalization of lending facilities. Market reactions to the news were relatively subdued.
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Real GDP: Fourth-Quarter 2009 Advance Estimate	February, 2010		John Lindner;	Economic Trends
	Abstract: GDP had its strongest quarter in more than six years, coming in above the majority of analysts’ estimates. However, the Blue Chip consensus forecast matches the overwhelming concern that a recovery from the current recession will be a slow one. Growth through 2010 should reflect such a return, as forecasters are predicting growth rates closer to the long-run average in all four quarters of the year.
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A Sign of Normalization	February, 2010		John Lindner; John B Carlson;	Economic Trends
	Abstract: During the recent financial turmoil, the Federal Reserve created several emergency credit facilities to address the extreme demands for liquidity. Several of these facilities involved lending to institutions outside the set of those permitted by the Federal Reserve Act in normal circumstances. Four of the Federal Reserve’s new credit facilities—AMLF, CPFF, PDCF and TSLF—were allowed to expire on February 1.
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Treasury Deposits and Excess Bank Reserves	January, 2010		John Lindner; John B Carlson;	Economic Trends
	Abstract: An interesting development on the Federal Reserve’s balance sheet is a decline in excess bank reserves. This decline has occurred despite an increase in the overall size of the Fed’s balance sheet. The key factor accounting for the decline in excess reserves is a substantial increase in U.S. treasury deposits at the Fed, which were made as a consequence of having issued new debt.
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Real GDP: Third-Quarter 2009 Third Estimate	January, 2010		John Lindner;	Economic Trends
	Abstract: Third-quarter GDP growth was revised down again in the third estimate. The downward revision was largely driven by an additional 1.8 percentage point decrease in business fixed investment and smaller reductions in personal consumption and private inventories. Other declines occurred in government spending and residential investment.
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Real GDP: Third-Quarter 2009 Second Estimate	November, 2009		John Lindner;	Economic Trends
	Abstract: Third-quarter GDP was revised down in the second estimate, as the annualized growth rate dropped from 3.5 to 2.7 percent, which was close to consensus expectations. The Blue Chip consensus forecast for 2009 real GDP growth improved again, despite the expected downward revisions to the third-quarter estimate. Released alongside the GDP revision was the preliminary estimate of third-quarter profits.
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Real GDP: Third-Quarter 2009 Advance Estimate	November, 2009		John Lindner;	Economic Trends
	Abstract: GDP rose at an annualized rate of 3.5 percent in the third quarter, somewhat higher than consensus expectations and pulling the four-quarter GDP growth rate up from −3.8 percent to −2.3 percent. The third quarter’s increase was driven in large part by a 3.4 percent jump in personal consumption expenditures, the largest quarterly gain in this component since the first quarter of 2007. One of the most noticeable pieces of this third-quarter advanced estimate is the return to growth of both imports and exports. Exports grew to over $128 billion, reaching their highest mark of this year, likely influenced by a modest dollar depreciation during the third quarter.
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Real GDP: Second-Quarter 2009 Final Estimate	October, 2009		John Lindner;	Economic Trends
	Abstract: Instead of falling at an annualized rate of −1.0 percent as reported in the second estimate, GDP now is estimated to have fallen only − 0.7 percent. Over 80 percent of respondents to the Blue Chip survey predict that the unemployment rate will not fall back below 7 percent until the second half of 2012. A historical pattern, referred to as Okun?s law, posits that there is an inverse relationship between changes in the unemployment rate and GDP growth, with year-over-year GDP growth moving twice as fast as the change in the unemployment rate.
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The Supplemental Financing Program	September, 2009		John Lindner; Joseph G Haubrich;	Economic Trends
	Abstract: The winding down of the Treasury’s Supplemental Financing Program has some worried about the consequences for excess reserves on the Fed’s balance sheet and, by extension, inflation down the road. While the reduction in the SFP will increase reserves, the growth in the monetary base that results is just a shifting of funds between Federal Reserve accounts. Based upon the current state of the economy, the growth will likely go unrealized.
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The Policy Statement: A Slowdown of Asset Purchases	September, 2009		John Lindner; John B Carlson;	Economic Trends
	Abstract: Today, the Fed announced that it would change the timing but not the quantity limit of agency mortgage-backed securities and agency debt.
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The Changing Composition of the Fed?s Balance Sheet	August, 2009		John Lindner; John B Carlson;	Economic Trends
	Abstract: Since the onset of the crisis, the Fed has created and employed a new set of tools that involve the acquisition of financial assets and thus expand the asset side of the balance sheet. Lending to financial institutions predominated in the early months after the crisis began, but large-scale asset purchases will be the bigger story going forward.
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Real GDP: Second-Quarter 2009 Revised Estimate	August, 2009		John Lindner; Brent Meyer;	Economic Trends
	Abstract: Real GDP was virtually unchanged in the latest revision of the second-quarter estimate, falling at an annualized rate of −1.0 percent. While the headline number was unchanged, there were some interesting moves in the components. In related news, results from two special questions on the Blue Chip survey of professional economists lend support to the view that this recovery will be slower than postwar trends would suggest.
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Implementing Long-Term Security Purchases	July, 2009		John Lindner; Timothy Bianco; Andrea Pescatori;	Economic Trends
	Abstract: During slowdowns in economic activity and periods of inflation, the optimal response is to lower the real rate. Traditionally, the Federal Reserve achieved this by reducing the target fed funds rate. In general (but with notable exceptions), this reduction has an effect also on yields of longer maturity, which can be thought of as a combination of current and future expected short-term rates, thus stimulating the economy. However, when short-term rates are close to zero the traditional tool is no longer feasible.
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