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The Federal Reserve's portfolio and its effects on mortgage markets

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  • Diana Hancock
  • Wayne Passmore
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    Abstract

    We provide an empirical analysis of the effects of the Federal Reserve's asset holdings on MBS yields and mortgage rates. We argue that understanding the particulars of the U.S. mortgage markets, particularly the linkages between the secondary and primary mortgage markets, is important. We find evidence that the Federal Reserve's portfolio holdings influence mortgage markets, through both a "portfolio balancing channel" and an "excess reserves" channel. These two channels can work in opposite directions and their magnitudes are difficult to estimate, but on net, larger Federal Reserve's portfolio holdings seem to have placed a significant downward influence on MBS yields and mortgage rates.

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    File URL: http://www.federalreserve.gov/pubs/feds/2012/201222/201222abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2012/201222/201222pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-22.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-22

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    1. Freixas, X. & Martin, A. & Skeie, D., 2010. "Bank Liquidity, Interbank Markets, and Monetary Policy," Discussion Paper 2010-35S, Tilburg University, Center for Economic Research.
    2. Andreas Fuster & Paul S. Willen, 2010. "$1.25 Trillion is still real money : some facts about the effects of the Federal Reserve’s mortgage market investments," Public Policy Discussion Paper 10-4, Federal Reserve Bank of Boston.
    3. Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series 2006-30, Board of Governors of the Federal Reserve System (U.S.).
    4. Jonathan H. Wright, 2011. "What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound?," NBER Working Papers 17154, National Bureau of Economic Research, Inc.
    5. Angela Maddaloni, 2011. "Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2121-2165.
    6. Antoine Martin & James McAndrews & David Skeie, 2011. "A note on bank lending in times of large bank reserves," Staff Reports 497, Federal Reserve Bank of New York.
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