A Skeptical View of the Impact of the Fed's Balance Sheet

96 Pages Posted: 13 Jun 2018

See all articles by David Greenlaw

David Greenlaw

Morgan Stanley

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Ethan S. Harris

Bank of America

Kenneth D. West

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2018

Abstract

We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. A rough consensus from previous studies is that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward.

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Suggested Citation

Greenlaw, David and Hamilton, James D. and Harris, Ethan S. and West, Kenneth D., A Skeptical View of the Impact of the Fed's Balance Sheet (June 2018). NBER Working Paper No. w24687, Available at SSRN: https://ssrn.com/abstract=3194838

David Greenlaw (Contact Author)

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James D. Hamilton

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Ethan S. Harris

Bank of America ( email )

Kenneth D. West

University of Wisconsin - Madison - Department of Economics ( email )

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