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September 2014 issue
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Hördahl, Tistani
Nakov, Thomas
Kelly, McQuinn
Aizenman, Glick
Arrondel, Savignac, Tracol
Cecchetti, Kohler
Bauer, Rudebusch
Tomura
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The Signaling Channel for Federal Reserve Bond Purchases

by Michael D. Bauer and Glenn D. Rudebusch
Federal Reserve Bank of San Francisco

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 Federal Reserve 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.

JEL Codes: E43, E52.

 
Full article (PDF, 57 pages, 493 kb)