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Expectations about the Federal Reserve’s Balance Sheet and the Term Structure of Interest Rates

Author

Listed:
  • Jane Ihrig

    (Board of Governors of the Federal Reserve System)

  • Elizabeth Klee

    (Board of Governors of the Federal Reserve System)

  • Canlin Li

    (Board of Governors of the Federal Reserve System)

  • Min Wei

    (Board of Governors of the Federal Reserve System)

  • Joe Kachovec

    (Board of Governors of the Federal Reserve System)

Abstract

This paper assesses the effects of the Federal Reserve’s asset purchase programs on Treasury yields, and provides a framework to evaluate these effects both initially and over time as market expectations of the economy and the Federal Reserve’s balance sheet evolve. Our framework suggests that the first purchase program had the largest initial impact on the ten-year Treasury yield, estimated to be about 34 basis points in early 2009. Although the effect of the first program waned considerably by the end of 2015, at that time all programs combined were depressing the ten-year yield by about 100 basis points, reflecting expectations of economic conditions and Federal Reserve policy.

Suggested Citation

  • Jane Ihrig & Elizabeth Klee & Canlin Li & Min Wei & Joe Kachovec, 2018. "Expectations about the Federal Reserve’s Balance Sheet and the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 341-391, March.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:1:a:8
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    References listed on IDEAS

    as
    1. Stefania D’Amico & William English & David López‐Salido & Edward Nelson, 2012. "The Federal Reserve's Large‐scale Asset Purchase Programmes: Rationale and Effects," Economic Journal, Royal Economic Society, vol. 122(564), pages 415-446, November.
    2. Canlin Li & Min Wei, 2013. "Term Structure Modeling with Supply Factors and the Federal Reserve's Large-Scale Asset Purchase Progarms," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 3-39, March.
    3. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 3-46, February.
    4. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2015. "A probability-based stress test of Federal Reserve assets and income," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 26-43.
    5. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
    6. Eric M. Engen & Thomas Laubach & David L. Reifschneider, 2015. "The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies," Finance and Economics Discussion Series 2015-5, Board of Governors of the Federal Reserve System (U.S.).
    7. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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