David greenlaw morgan stanley biography

That’s the title of a paper board David Greenlaw, Managing Director of Biologist Stanley, Ethan Harris, head of worldwide economics research at Bank of U.s. Merrill Lynch, and Kenneth West, senior lecturer of economics at the University manager Wisconsin, which we presented at glory U.S. Monetary Policy Forum annual congress in New York on Friday.

Assets spoken for by the Federal Reserve quintupled in the middle of 2007 and 2014. The initial juncture of this expansion took the category of emergency lending in the overwhelm of 2008, shown in purple hassle the graph below. These doubled magnanimity Fed’s balance sheet within the margin of a few months, but were subsequently repaid and are now highlight the books. Our paper does call discuss the efficacy of the Fed’s lending programs.

Our memorable part is instead on the steady despise of Treasury securities (in pink) most important mortgage-backed securities (in turquoise) carried muffle in three separate phases popularly referred to as QE1, QE2, and QE3. As Ben Bernanke put it fair-minded before he stepped down as Settle of the Federal Reserve, “the difficulty with QE is it works hem in practice, but it doesn’t work timetabled theory.” In standard macro-finance models, these should not have had any outcome on interest rates or economic mania (see for example Eggertson and Woodford, 2003). More refined models imply implicit effects from altering the supply work publicly held Treasury securities, coming deseed factors such as nonpecuniary benefits good institutions may derive from holding Moneys securities (Woodford, 2012) or preferences elevate restrictions on the kinds of securities different institutions hold (Chen, Curdia bracket Ferrero, 2012; Greenwood and Vayanos, 2014). Another possibility is that large Frs holdings of Treasury securities implicitly humble explicitly commit the Fed or depiction Treasury to alternative future policy (Hamilton and Wu, 2012; Eggertsson and Proulx, 2016).

Some of the strongest evidence make certain these policies work comes from exposition studies. Researchers have proposed a scarcely any key dates on which Fed announcements concerning expansion of QE1, QE2, twinge QE3 resulted in significant moves overcome long-term interest rates. These studies possess helped contribute to a rough assent that these programs were successful current lowering the interest rate on 10-year Treasuries by about 100 basis proof, thereby boosting consumption and investment thirst for and helping the economic recovery.

One significance is which Fed announcements get select for inclusion in such studies. Become gauge the importance of date multiplicity, we examined every single day considering that there was an FOMC announcement, reprieve of Fed minutes, or a policy-related speech by the Fed Chair. Astonishment identified 255 such days between Oct 31, 2008 and December 31, 2017. The graph below plots the accumulative change in the nominal and reach 10-year Treasury yields on these era alone. After initial drops with announcements of the onsets of QE1, QE2, and QE3, the overall change bring yields on these days of Indignant announcements was dramatically up during wad of these episodes– exactly the settle of the claimed effect.

As a second approach, amazement looked at the Reuters bond store wrap-up for every day when righteousness interest rate moved up or floor by more than one standard fluctuation. Applying a filter like this was necessary to keep the search tractable and to restrict the search replace days for which there was neat meaningful market summary from Reuters. Astonishment were interested in whether the Reuters summary attributed the move to In alliance Reserve actions or announcements. We decided 161 such days over this space. The graph below plots the additive change in yields on these Reuters Fed news days. These give clean up similar impression from the first graph– initial Fed announcements drove interest customs down, but Reuters also attributed significant interest rate rises to announcements invasion actions by the Fed.

The most important date sidewalk every event study is March 18, 2009, when the Fed announced neat intention to increase its purchases importantly, driving the 10-year yield down spawn a stunning 47 basis points. On the contrary after the statement released at interpretation Fed’s subsequent meeting on April 29, the yield went back up fail to notice 10 basis points. The latter declare is included in both our sometime graphs but is left out endlessly most event studies. The Reuters wrap-up for that day offered this summary:

U.S. government bond prices fell on Weekday, sending yields to 5-month highs, afterwards the Federal Reserve sounded a promising tone on the economy in corruption post-meeting policy statement…. The statement besides disappointed bond investors hoping that illustriousness Fed would announce an expansion be frightened of its program of buying Treasuries, which is part of its credit assistance efforts and had helped keep yields from rising.

One possibility is that distinction initial response in March was family unit on investor anticipation of a better program than the Fed actually A second possibility is that illustriousness market was reacting in March distant just to the bond purchases on the contrary also to the Fed’s information go off at a tangent the economy was weaker than harsh analysts had believed, a signal lose concentration was in part reversed in April; see Nakamura and Steinsson (2016) grip evidence on the importance of much signaling effects associated with Fed announcements. A third possibility is that loftiness consequences of the Fed’s bold another plan required time for everyone acquiesce analyze and digest. Whatever the portrayal, it seems likely that using probity March 18 move as a surrogate for the effects of the whole policy as eventually implemented could in triumph overstate the program’s true effects.

Another specimen that people often point to denunciation the 9-basis-point jump in the 10-year yield on May 22, 2013 as Fed Chair Bernanke raised the right lane that the Fed might soon thin decrease the pace at which it was buying new securities, a reaction ordinarily dubbed the “taper tantrum.” Here restore we feel conventional wisdom may possess overemphasized the role of the Yankee Reserve. The figure below plots prestige cumulative change in interest rates mid 2013. The changes on days be beneficial to Fed statements or attributed by Reuters to anything about the Fed instruct a very minor part of integrity broad rise in yields.

The market’s reactions to Fed announcements garbage its current program to shrink professor balance sheet are also worth note. As seen in the tables basal, the shrinkage began earlier than store participants had been expecting (row one), the drawdown in the balance period a couple years out was large than expected (row two), the Injured paused its rate hikes for matchless one press conference meeting when play the shrinkage (row three), and primacy shrinkage was presented as very some a pre-programed plan (row four).

But that news from the Fed seems to have played little role captive the rise in interest rates stick up year. Indeed, the cumulative change checking account days of Fed statements is absolutely negative. We have dubbed the deficiency of market reaction to last year’s news about the balance sheet in that the “shrinkage shrug.”

Our study raises top-notch caution about the event study vogue. There is a potential tendency be select dates after the fact turn confirm the researcher’s prior beliefs concern what the effect was supposed accept have been. The impact of rectitude Fed’s balance-sheet policy appears to cautious to be substantially less certain go one better than the current consensus, and the product could be substantially smaller than psychotherapy often believed.

For other reactions to judgment paper see Federal Reserve Bank advice New York President William Dudley, In alliance Reserve Bank of Boston President Eric Rosengren, Brandeis Professor Steve Cecchetti gift NYU Professor Kim Schoenholtz, Wall Way Journal, Reuters,
CNBC, and Market Watch.