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Expectations about the Federal Reserve's balance sheet and the term structure of interest rates

Author

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  • Jane E. Ihrig
  • Elizabeth C. Klee
  • Canlin Li
  • Brett Schulte
  • Min Wei

Abstract

This 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.

Suggested Citation

  • Jane E. Ihrig & Elizabeth C. Klee & Canlin Li & Brett Schulte & Min Wei, 2012. "Expectations about the Federal Reserve's balance sheet and the term structure of interest rates," Finance and Economics Discussion Series 2012-57, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-57
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    References listed on IDEAS

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    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. 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.
    4. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.).
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    Cited by:

    1. Bailey, Andrew & Bridges, Jonathan & Harrison, Richard & Jones, Josh & Mankodi, Aakash, 2020. "The central bank balance sheet as a policy tool: past, present and future," Bank of England working papers 899, Bank of England.
    2. Adrien Alvero & Andreas M. Fischer, 2016. "Exchange rate floor and central bank balance sheets: Simple spillover tests of the Swiss franc," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(02), pages 31-50, August.
    3. Dario Caldara & Etienne Gagnon & Enrique Martinez-Garcia & Christopher J. Neely, 2020. "Monetary Policy and Economic Performance since the Financial Crisis," Working Papers 2020-026, Federal Reserve Bank of St. Louis, revised 02 Nov 2020.
    4. Carpenter, Seth & Demiralp, Selva & Ihrig, Jane & Klee, Elizabeth, 2015. "Analyzing Federal Reserve asset purchases: From whom does the Fed buy?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 230-244.
    5. Stephanie Titzck & Jan Willem van den End, 2019. "The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices," DNB Working Papers 627, Netherlands Central Bank, Research Department.
    6. Dario Caldara & Etienne Gagnon & Enrique Martinez-Garcia & Christopher J. Neely, 2020. "Monetary Policy and Economic Performance since the Financial Crisis," Working Papers 2020-026, Federal Reserve Bank of St. Louis, revised 02 Nov 2020.
    7. Alexander D. Gromov, 2017. "The Efficiency of Russian Higher Education Institutions and its Determinants," HSE Working papers WP BRP 40/EDU/2017, National Research University Higher School of Economics.
    8. Naoko Hara & Ryuzo Miyao & Tatsuyoshi Okimoto, 2020. "The Effects Of Asset Purchases And Normalization Of U.S. Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1279-1296, July.
    9. Breckenfelder, Johannes & De Fiore, Fiorella & Andrade, Philippe & Karadi, Peter & Tristani, Oreste, 2016. "The ECB's asset purchase programme: an early assessment," Working Paper Series 1956, European Central Bank.
    10. Huseyin Ozturk, 2020. "The shape of sovereign yield curve in an emerging economy: Do macroeconomic or external factors matter?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 83-112, February.
    11. Eser, Fabian & Lemke, Wolfgang & Nyholm, Ken & Radde, Sören & Vladu, Andreea Liliana, 2019. "Tracing the impact of the ECB’s asset purchase programme on the yield curve," Working Paper Series 2293, European Central Bank.
    12. Andrea Landi, Alex Sclip, Valeria Venturelli, 2019. "The effect of the Fed zero-lower bound announcementon bank profitability and diversification," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0079, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Tomoo Inoue & Tatsuyoshi Okimoto, 2020. "International Spillover Effects of Unconventional Monetary Policies of Major Central Banks," Working Papers hal-02938960, HAL.

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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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