Expectations about the Federal Reserve's balance sheet and the term structure of interest rates
AbstractThis paper provides a systematic assessment of the effect of the Federal Reserve's asset purchase programs on Treasury yields, with particular emphasis on the role of market expectations about the evolution of the Federal Reserve's balance sheet and of interest rates on the impact of the programs. We construct measures of such market expectations based on Blue Chip survey forecasts, Congressional Budget Office projections, and information from formal FOMC communications. Those measures are combined with a no-arbitrage term structure model, in which yields are driven by current and expected future private Treasury holdings, among other factors. This approach allows us to provide estimates of the term premium effects of the asset programs both at the time of the announcements and in the future as expectations about the economy and the Federal Reserve's balance sheet evolve. Our results suggest that the program with the largest initial impact on the ten year Treasury yield was the first purchase program, which is estimated to have held down rates by about 40 basis points in early 2009, and the initial maturity extension program had the second largest estimated impact at its inception, pushing rates down by about 20 basis points in late 2011. Currently, we estimate all programs combined are holding down the 10-year yield by about 65 basis points, of which about one-third is attributable to the first purchase program.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-57.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.