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Fed Asset Buying and Private Borrowing Rates

01 Jan 2012-FRBSF Economic Letter (Federal Reserve Bank of San Francisco)-
TL;DR: In this article, the authors reviewed the impact of the Fed's balance sheet policies on private borrowing rates, such as corporate bond yields and mortgage rates, and examined the channels through which they likely have affected longer-term interest rates.
Abstract: With the federal funds rate, the traditional policy tool of the Federal Reserve, effectively reaching zero in late 2008, policymakers have turned to unconventional policy tools to further ease the stance of monetary policy (Williams 2011). These tools are aimed at lowering longer-term interest rates to stimulate economic activity and reduce unemployment. They can be grouped into two categories: communication and balance sheet policies. The Federal Open Market Committee (FOMC) has taken new communication initiatives by providing forward guidance about future policy. In August 2011, it started to explicitly lay out its expectations for the future path of the federal funds rate. The Fed’s unconventional balance sheet policies began in 2009 with a program of large-scale asset purchases (LSAPs) of Treasury and mortgage-backed securities, followed by further purchase programs. These purchases have been designed to put downward pressure on longer-term interest rates. Unconventional monetary policy actions can only be successful in stimulating the economy if they lower the interest rates that matter most for businesses and households, that is, the private borrowing rates that determine the cost of funds for the private sector. This Economic Letter reviews the Fed’s balance sheet programs, providing evidence about their impact on private borrowing rates, such as corporate bond yields and mortgage rates. To help understand the financial-market effects of these programs, the Letter examines the channels through which they likely have affected longer-term interest rates. It also looks at mortgage spreads, which capture the difference between the return to investors on mortgage bonds and mortgage costs to homeowners, focusing on factors that may limit pass-through to primary mortgage rates. Three rounds of asset purchases
Citations
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Journal ArticleDOI
TL;DR: In this paper, the authors examined the determinants of net private capital in emerging market economies and found that growth and interest rate dierentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants.

623 citations

Journal ArticleDOI
TL;DR: The Japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks and as a result, Japan’s banks only slowly recognized bad loans, while stopping lending to promising new projects as mentioned in this paper.
Abstract: Japan’s deleveraging became serious because the negative feedback loop was Japan’s deleveraging became serious because the negative feedback loop was not contained in its early stage of development. The Japanese government did not not contained in its early stage of development. The Japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks. As a result, Japan’s banks only capital buffer due to their large holdings of stocks. As a result, Japan’s banks only slowly recognized bad loans, while stopping lending to promising new projects. Slow slowly recognized bad loans, while stopping lending to promising new projects. Slow but protracted asset sales resulted in a long period of asset price declines. Nonfi nanbut protracted asset sales resulted in a long period of asset price declines. Nonfi nancial companies perceived the deterioration of their balance sheets as permanent cial companies perceived the deterioration of their balance sheets as permanent and cut spending drastically. As Japan’s economy stagnated, the total amount of bad and cut spending drastically. As Japan’s economy stagnated, the total amount of bad loans turned out to be much larger than initially estimated. loans turned out to be much larger than initially estimated.

64 citations


Cites background from "Fed Asset Buying and Private Borrow..."

  • ...Something similar may be taking place in the United States, as a study by Bauer (2012) points out....

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  • ...The decline in effectiveness seems to be due to the disappearance of the credit easing aspect of the purchases as markets returned to normalcy and also due to the repeated use of other measures such as forward guidance to lower interest rates (Bauer 2012)....

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  • ...Bauer (2012) argues that large-scale asset purchases, by sending the signal that the central bank will continue to be aggressive in monetary easing in the future, also entail an element of forward guidance—a signaling effect....

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Journal ArticleDOI
TL;DR: In this paper, the authors show that unconventional monetary policy in the United States appears to influence capital inflows to Brazil and, through this channel, its overall economic outlook and financial stability.

58 citations


Cites background from "Fed Asset Buying and Private Borrow..."

  • ...(2011); Bauer (2012); Willians (2011))....

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  • ...Other papers survey the literature from a policy perspective (Bauer, 2012; Willians, 2011)....

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Journal ArticleDOI
Kazuo Ueda1
TL;DR: This article investigated the causes of the recent sharp response of the yen and Japanese stock prices to the discussion of, and the subsequent implementation of bold monetary easing by the Bank of Japan as demanded by Prime Minister Abe.
Abstract: In this paper, I investigate the causes of the recent sharp response of the yen and Japanese stock prices to the discussion of, and the subsequent implementation of bold monetary easing by the Bank of Japan as demanded by Prime Minister Abe. I present statistical evidence that the response of the two asset prices have indeed been unusually large relative to the past experience with nonconventional monetary policy (NCM) even after allowance is given for the rise in global economic activity and asset prices. I also point out that the rally has been led by speculative trading by foreign investors, while domestic investors have largely stayed on the sidelines. I discuss possible reasons for such foreign investor behavior. Simply put, the unprecedented political pressure raised hopes of the adoption of bold measures by the Bank of Japan. I discuss, however, the possibility that the room for further action by the Bank is quite limited apart from what might be called a targeted helicopter drop of money. I also point out the possibility that investor behavior may have not been based on economic fundamentals. The asset price volatility since April 2013 is interpreted in the light of such discussions.

28 citations


Cites background from "Fed Asset Buying and Private Borrow..."

  • ...3 Bauer (2012) argues that large-scale asset purchases or QE0, by sending a signal that the central bank will continue to be aggressive in monetary easing in the future, also entails an element of forward guidance – a signaling effect....

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References
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Journal ArticleDOI
TL;DR: In this paper, the effect of the Federal Reserve's purchase of long-term Treasuries and other longterm bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates was evaluated using an event-study methodology.
Abstract: We evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the market's anticipation of lower future federal funds rates.

1,116 citations


"Fed Asset Buying and Private Borrow..." refers background in this paper

  • ...Unconventional monetary policy actions can only be successful in stimulating the economy if they lower the interest rates that matter most for businesses and households, that is, the private borrowing rates that determine the cost of funds for the private sector....

    [...]

  • ...Krishnamurthy and Vissing-Jorgensen (2011) identify the key QE2 announcement dates, excluding Chairman Bernanke’s speech on August 27 because interest rates increased strongly that day due to other news....

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Book
20 Sep 2012
TL;DR: In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substan tial quantities of assets with medium and long maturities as discussed by the authors.
Abstract: Since December 2008, the Federal Reserve’s traditio nal policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as th e economic outlook deteriorated, the Federal Reserve purchased substan tial quantities of assets with medium and long maturities. In this paper, we expl ain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases le d to economically meaningful and long-lasting reductions in longer-te rm interest rates on a range of securities, including securities that were not incl uded in the purchase programs. These reductions in interest rates primarily reflec t lower risk premiums, including term premiums, rather than lower expectations of fu ture short-term interest rates.

772 citations


"Fed Asset Buying and Private Borrow..." refers background in this paper

  • ...To quantify the effects of LSAPs on interest rates, one possible approach is to focus on rate changes on days when the Fed made key announcements about these programs, since markets usually react immediately when the Fed signals future purchases (see Bauer and Rudebusch 2011 and Gagnon et al. 2011)....

    [...]

  • ...Gagnon et al. (2011) and Krishnamurthy and VissingJorgensen (2011) documented similar effects on other MBS and corporate bond yields, confirming that the QE1 effects were large and widespread....

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  • ...Notably, however, the link between rates on mortgage-backed securities and actual mortgage rates has weakened in the wake of the financial crisis....

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  • ...Gagnon et al (2011) emphasize this channel for QE1....

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Posted Content
TL;DR: In this article, a model-free analysis and dynamic term structure models were used to decompose declines in yields following Fed announcements into changes in risk premia and expected short rates.
Abstract: Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short-term interest rates. Our evidence comes from a model-free analysis and from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider bias-corrected model estimation and restricted risk price estimation. In comparison with other studies, our estimates of signaling effects are larger in magnitude and statistical significance.

368 citations


"Fed Asset Buying and Private Borrow..." refers background in this paper

  • ...Bauer and Rudebusch (2011) argue that this channel played an important role for QE1....

    [...]

  • ...To quantify the effects of LSAPs on interest rates, one possible approach is to focus on rate changes on days when the Fed made key announcements about these programs, since markets usually react immediately when the Fed signals future purchases (see Bauer and Rudebusch 2011 and Gagnon et al. 2011)....

    [...]

  • ...Notably, however, the link between rates on mortgage-backed securities and actual mortgage rates has weakened in the wake of the financial crisis....

    [...]

Posted Content
TL;DR: The Swiss National Bank Research Conference, Zurich, Switzerland, September 23, 2011 as mentioned in this paper, presented a paper on the Swiss Nationalbank Research Conference 2011, presented by Bernhard et al.
Abstract: Presentation to the Swiss National Bank Research Conference, Zurich, Switzerland, September 23, 2011

114 citations


"Fed Asset Buying and Private Borrow..." refers methods in this paper

  • ...With the federal funds rate, the traditional policy tool of the Federal Reserve, effectively reaching zero in late 2008, policymakers have turned to unconventional policy tools to further ease the stance of monetary policy (Williams 2011)....

    [...]

Posted Content
TL;DR: In this article, the authors investigated the portfolio balance effects of Federal Reserve bond purchases and found that such purchases have important signaling effects that lower expected future short-term interest rates, and characterized the uncertainty regarding the relative importance of the signaling and portfolio balance channels.
Abstract: Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short term interest rates. Our evidence comes from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider unbiased model estimation and restricted risk price estimation. We also characterize the estimation uncertainty regarding the relative importance of the signaling and portfolio balance channels.

23 citations