Expectations about the Federal Reserve's Balance Sheet and the Term Structure of Interest Rates

This paper assesses the effects of the Federal Reserve's asset purchase programs on Treasury yields, and provides a framework to evaluate these effects both initially and over time as market expectations of the economy and the Federal Reserve's balance sheet evolve. Our framework suggests that the first purchase program had the largest initial impact on the ten-year Treasury yield, estimated to be about 34 basis points in early 2009. Although the effect of the first program waned considerably by the end of 2015, at that time all programs combined were depressing the ten-year yield by about 100 basis points, reflecting expectations of economic conditions and Federal Reserve policy.