Analyzing Federal Reserve Asset Purchases: From Whom Does the Fed Buy?

28 Pages Posted: 25 May 2013

See all articles by Seth B. Carpenter

Seth B. Carpenter

Board of Governors of the Federal Reserve System

Selva Demiralp

Koc University - Department of Economics

Jane E. Ihrig

Board of Governors of the Federal Reserve System

Elizabeth Klee

Board of Governors of the Federal Reserve System

Date Written: April 12, 2013

Abstract

Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the policies. Several papers provide evidence that these programs do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. We exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households, with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.

Keywords: Quantitative easing, portfolio balancing, Federal Reserve, unconventional monetary policy, interest rates

JEL Classification: E58, E44, E65, G11, G01

Suggested Citation

Carpenter, Seth B. and Demiralp, Selva and Ihrig, Jane E. and Klee, Elizabeth, Analyzing Federal Reserve Asset Purchases: From Whom Does the Fed Buy? (April 12, 2013). FEDS Working Paper No. 2013-32, Available at SSRN: https://ssrn.com/abstract=2269104 or http://dx.doi.org/10.2139/ssrn.2269104

Seth B. Carpenter

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2385 (Phone)
202-452-2301 (Fax)

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Jane E. Ihrig

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Elizabeth Klee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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