Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent...
-
Upload
jesse-whitehead -
Category
Documents
-
view
212 -
download
0
Transcript of Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent...
![Page 1: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/1.jpg)
Evaluation of large-scale asset purchases
![Page 2: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/2.jpg)
• Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills
• Pay about the same interest• Are both short-term liabilities of the U.S.
government• Nothing special about Fed deposits now
that they are far beyond what banks need to meet requirements or have adequate liquidity
![Page 3: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/3.jpg)
• Hamilton and Wu (2012)– historically changes in maturity composition of U.S. Treasury debt predicted very modest changes in yield on short-term versus long-term bonds.
• Used this correlation to predict what would happen if Fed swapped its entire holdings of short-term Treasuries in Dec 2006 ($400 B) for the very longest-term Treasury debt they could buy.
![Page 4: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/4.jpg)
Hamilton-Wu estimated effects in 2006 (blue) and at the zero lower bound (red)
Horizontal axis: maturity (in weeks)Vertical axis: change in yield (in percentage points)
![Page 5: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/5.jpg)
Source: Williams (2013)
![Page 6: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/6.jpg)
Event study methodology
• Nov 25, 2008: LSAP announced• Dec 1, 2008: Bernanke: “could purchase
longer-term Treasury… in substantial quantities”
• Dec 16, 2008: FOMC “stands ready to expand its purchases of agency debt and mortgage-backed securities”
• Mar 18, 2009: Announced new purchases of MBS and agency debt
![Page 7: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/7.jpg)
10-year yield fell 170 bp Nov 3 - Dec 31
fell 61 bp on 3 indicated dates
![Page 8: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/8.jpg)
Oil price declined 30% Nov 3 - Dec 31
fell 19% on 3 indicated dates
![Page 9: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/9.jpg)
9:00 10:12 11:24 12:36 13:48 15:00 16:122.25
2.3
2.35
2.4
2.45
2.5
2.55
2.6
Dec 16, 2008: 10-year Treasury (TNX)
9:00 10:12 11:24 12:36 13:48 15:00 16:1234
34.5
35
35.5
36
36.5
37
37.5
38
38.5
Dec 16, 2008: crude oil price (USO)
9:00 10:12 11:24 12:36 13:48 15:00 16:12850
860
870
880
890
900
910
920
Dec 16, 2008: S&P500 (SPX)
![Page 10: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/10.jpg)
9:00 10:12 11:24 12:36 13:48 15:00 16:122.4
2.5
2.6
2.7
2.8
2.9
3
3.1
Mar 18, 2009: 10-year Treasury (TNX)
9:00 10:12 11:24 12:36 13:48 15:00 16:1227
27.5
28
28.5
29
29.5
30
Mar 18, 2009: crude oil price (USO)
9:00 10:12 11:24 12:36 13:48 15:00 16:12740
750
760
770
780
790
800
810
Mar 18, 2009: S&P500 (SPX)
![Page 11: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/11.jpg)
11
![Page 12: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/12.jpg)
But longer-term evidence of effects is not clear
12
![Page 13: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/13.jpg)
• LSAP so far has been very profitable for the Fed
• Borrow at 0.25% (interest on Federal Reserve deposits) lend at 2% (interest on 10-year Treasury bond)
• But if interest rates rise, value of 10-year Treasury bonds will rise, Fed would sell at a loss
• Would negative Fed net worth undermine confidence in dollar and the Fed?
![Page 14: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/14.jpg)
Greenlaw, et. al. (Feb 2013)• Examined what would happen to Fed’s
portfolio under Blue Chip consensus forecast as of Feb 2013 for interest rates and under assumption Fed started to sell its long-term holdings in 2015
• Found Fed would have operating loss 2017-2019
![Page 15: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/15.jpg)
Actual 10-year yield, CBO projections in 2013 and 2015, and implied path from current yield curve
![Page 16: Evaluation of large- scale asset purchases. Deposits with Federal Reserve are essentially equivalent to 3-month treasury bills Pay about the same interest.](https://reader035.fdocuments.in/reader035/viewer/2022081603/56649f1b5503460f94c318f2/html5/thumbnails/16.jpg)
• Actual 10-year yields have fallen, not risen since 2013.
• The Fed bought even more long-term assets and now plans not to sell.
• The Fed is making even bigger profits.