Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets
I extend the methods of Gürkaynak, Sack, and Swanson (2005) to separately identify the effects of Federal Reserve forward guidance and large-scale asset purchases (LSAPs) during the 2009–15 U.S. zero lower bound (ZLB) period. I find that both forward guidance and LSAPs had substantial and highly statistically significant effects on medium-term Treasury yields, stock prices, and exchange rates, comparable in magnitude to the effects of the federal funds rate before the ZLB. Forward guidance was more effective than LSAPs at moving short-term Treasury yields, while LSAPs were more effective than forward guidance and the federal funds rate at moving longer-term Treasury yields, corporate bond yields, and interest rate uncertainty. However, the effects of forward guidance were not very persistent, with a half-life of 1–4 months. The effects of LSAPs seem to be more persistent. I conclude that, overall in terms of these criteria, LSAPs were a more effective policy tool than forward guidance during the ZLB period.
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