The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates

9 Pages Posted: 1 Jan 2019

See all articles by Brian Bonis

Brian Bonis

George Mason University; Board of Governors of the Federal Reserve System

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Date Written: April 20, 2017

Abstract

In an effort to promote more accommodative financial conditions following the financial crisis of 2008 and the ensuing recession, and at a time when the conventional monetary policy tool--the federal funds rate--was at its effective lower bound, the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). By increasing the amount of longer-term Treasury securities and agency MBS on the Federal Reserve's balance sheet, and thereby reducing the amount of longer-term Treasury securities and agency MBS that the public would have held otherwise, these purchase programs put downward pressure on longer-term interest rates. This note outlines a way to estimate by how much Federal Reserve securities holdings resulting from these purchase programs reduce longer-term interest rates. In particular, we estimate the term premium effect (TPE) on the 10-year Treasury yield. Currently, our model suggests that the cumulative effect of the Federal Reserve's LSAPs and MEP results in a reduction in the 10-year Treasury yield term premium of about 100 basis points. By the end of 2017, the term premium will be held down by about 85 basis points. The slight narrowing of the TPE reflects the average maturity of the Federal Reserve's portfolio declining and the cessation of reinvestments drawing nearer.

Keywords: Federal Reserve, monetary policy, term premium effect

JEL Classification: E5

Suggested Citation

Bonis, Brian and Ihrig, Jane E. and Wei, Min, The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates (April 20, 2017). GMU Working Paper in Economics. Available at SSRN: https://ssrn.com/abstract=3300780 or http://dx.doi.org/10.2139/ssrn.3300780

Brian Bonis (Contact Author)

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

Board of Governors of the Federal Reserve System ( email )

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

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions ( email )

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

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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