In this short note, FRBSF economists say the Fed’s asset purchases were very useful.
They summarise their paper on the same topic:
An analysis shows that the Federal Reserve’s large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed’s securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.
They say main purpose of the asset purchases is to bring yields down. How does this happen?
Three main channels have been identified.
One is that such actions may signal to market participants the Fed’s desire to hold short-term interest rates low for a longer time. Such an expectation of lower future short-term interest rates will lower long-term rates.
A second channel works through the beneficial market effects that such purchases can have in times of stress. For example, the spreads between mortgage rates and U.S. Treasury yields rose to very high levels during the height of the financial crisis in late 2008, but fell markedly after the Fed announced its intention of buying agency mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.
The third channel–and probably the most important–results from the way central bank asset purchases reduce the overall supply of longer-term securities available to investors, thereby pushing up securities prices and pushing down yields.
They explain various papers/models which have attempted to estimate the initial effects.
Several recent studies have sought to estimate the effects of the Fed’s large-scale asset purchases on U.S. long-term interest rates (see Gagnon et al. 2010, D’Amico and King 2010, Doh 2010, and Hamilton and Wu 2010). Other researchers employing a variety of techniques have examined the quantitative effects of similar unconventional policy actions carried out abroad, such as the Bank of England’s quantitative-easing program (see Meier 2009 and Joyce et al. 2010). The consensus from this research is that central bank asset purchases have significantly reduced the general level of longer-term interest rates. These studies suggest that, on balance, the first round of asset purchases probably lowered yields on the 10-year Treasury note and high-grade corporate bonds by around half a percentage point. To put this in perspective, it would take roughly a 2 percentage point cut in the federal funds rate to achieve an equivalent half percentage point drop in the 10-year Treasury yield, based on patterns since 1987.
A booster for Bernanke’s policies.
In a related post, Dave Altig of Atlanta Fed posts that Fed policies were inline with economic thinking and have delivered. He reacts to an article from John Taylor who has been criticising Fed policies for long.