Large-Scale Asset Purchases by the Federal Reserve:
Did They Work?
Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack1
March 2010

1Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics. Matthew Raskin is an economic analyst and Julie Remache is asupervisor in the Markets Group of the Federal Reserve Bank of New York. Brian Sack is executive vice president and head of the Markets Group of the Federal
Reserve Bank of New York, and manages the System Open Market Account for the FOMC. The authors thank Seamus Brown, Mark Cabana, Michelle Ezer,
Michael Fleming, Jeremy Forster, Joshua Frost, Allen Harvey, Spence Hilton, Warren Hrung, Frank Keane, Karin Kimbrough, David Lucca, Brian Madigan,
Patricia Mosser, Lisa Stowe, Richard Wagreich, and Jonathan Wright for helpful comments, Clara Sheets for valuable research assistance, and Carol Bertaut for
guidance on the foreign official holdings data. The views expressed are those of the authors and do not necessarily reflect the positions of the Peterson Institute,
the Federal Reserve Bank of New York, or the Federal Reserve System.

-2-• November 25, 2008: Fed announces $600 billion
purchases of agency debt and agency MBS.
o Designed to aid mortgage market.
• December 1, 2008: Chairman Bernanke says Fed “couldpurchase longer-term Treasury securities … in substantialquantities.”• December 16, 2008: FOMC sets federal funds rate at zerobound and affirms possibility of buying longer-term
Treasury securities.
• January 28, 2009: FOMC puts off Treasury purchases.
• March 18, 2009: FOMC expands purchases to $1750
billion of longer-term assets, including $300 billion oflonger-term Treasury securities.

-3-• Large-scale asset purchases (LSAPs) removed 22% oflonger-term Agency, Agency MBS, and Treasury securities
from the market.
o This represents a large reduction in the duration of debt
securities available to private investors.
• Portfolio balance model suggests that this policy action
could have a significant effect on the term premium.
o As in Operation Twist, only much bigger.
o Term premium effect likely to be persistent.
• Purchases also had calming effects on stressed markets.
o These effects likely faded as conditions returned tonormal.

Chart 1: Distribution of Agency Debt Purchases by Maturity(through January 31, 2010)
10080$ billion

60

40

2000 - 3 mths

> 3 mths - 2 years> 2 to 5 years
Maturity Bucket

Source: Federal Reserve Bank of New York> 5 to 10 years> 10 years

-2-Chart 2: Distribution of MBS Purchases by Coupon(through January 31, 2010)
600

500

$ billion

400

300

200

100

03.5

44.55Coupon Rate

Source: Federal Reserve Bank of New York5.566.5

-3-Chart 3: Distribution of Treasury Purchases by Maturity
10080$ billion

60

40

2001-2 Yrs

2-3 Yrs

3-4.5 Yrs

4.5-7 Yrs7-10 Yrs

Maturity Bucket

Source: Federal Reserve Bank of New York

10-17 Yrs

17-30 Yrs

TIPS-4-

Chart 4: Pace of Purchases by Asset Class (through January 31, 2010)
200160$ billion

120

8040

Treasury

Source: Federal Reserve Bank of New York

Agency Debt

Agency MBSTotal

Jan-10

Dec-09

Nov-09Oct-09Sep-09Aug-09Jul-09Jun-09

May-09Apr-09Mar-09Feb-09

Jan-09Dec-080

-5-

Two Ways to Measure Effects:
1. Add up interest rate movements on days with Federal
Reserve communications on LSAPs.
- Assumes market prices adjust quickly to news- Assumes expected purchases have no effect- Assumes all news is in Fed communications- Assumes no other news occurred on those days
- Assumes effect is linked to Fed holdings, i.e.,
persistent
2. Regression analysis of term premium and net supply of
long-term bonds by the official sector prior to LSAPs.

-6-

Table 1: Interest Rate Changes around Baseline and Extended
Event Set Announcements
2y 10y 10y Agy 10y 10y Baa
UST UST Agy MBS TP Swap Index

DateEvent

11/25/
2008*
12/1/
2008*
12/16/
2008*
1/28/
2009*
3/18/
2009*
4/29/
2009
6/24/2009Initial LSAPAnnouncement-2-22-58-44-17-29-18

Chairman Speech-8-19-39-15-17-17-12

FOMC Statement-9-26-29-37-12-32-11

FOMC Statement

101414119142

FOMC Statement-22-47-52-31#-40-39-29

FOMC Statement

110-1

668-3

FOMC Statement10632445

-7-

8/12/
2009*
9/23/
2009*
11/4/
2009*
12/16/
2009
1/28/
2010
1/6/
2009
2/18/
2009
4/8/
2009
5/20/
2009
7/15/
2009

FOMC Statement-25423

12

FOMC Statement

1-3-3-1-1-5-4

FOMC Statement-2681553

FOMC Statement

-2

10-1

11-1

FOMC Statement-6-10-1

1-10

Minutes Release0-43-17-1-9-14

Minutes Release

911468916

Minutes Release2-4-7-9-4-6-6

Minutes Release-5-5-5-7-4-4-10

Minutes Release

71316

16

1016

7

-8-Date
9/2/2009
10/14/2009
11/24/2009
1/6/2010

Event

2y 10y 10y Agy 10y 10y Baa
UST UST Agy MBS TP Swap Index

Minutes Release-1-6-6-4-7-8-5

Minutes Release

17103778Minutes Release0-5-5-9-5-6-3

Minutes Release-265467-1

Baseline Event Set-34-91 -156 -113 -71 -101

-67

Baseline Set + All FOMC

-19-62 -140 -123 -50

-83

-74

-39

30

20-482

Cumulative Change:
11/24/08 to 1/28/2010* Included in the baseline event set.
#Two-day change for agency MBS on March 18, 2009 due to a Bloomberg data error.

-96-10921

-9-

Chart 5: Cumulative Interest Changes on Baseline Event Set Days
0-34-50-67

basis points-71-91-101-100-113-156-150-2002y
UST

Source: Bloomberg, Barclay’s Capital

10y
UST

10y
Agy

Agy
MBS10yTP10y
SwapBaaIndex

- 10 -

Chart 6: Cumulative Changes since November 2008, Event vs. non-Event Days
2001000basis points-100-200-300-400-500-600
2y
UST

10y
UST

Event Days
Source: Bloomberg, Barclay’s Capital

10y
Agy

Non-Event Days

Agy
MBS10yTPAll Days: 11/24/08 to 1/28/10

10y
Swap

BaaIndex

- 11 -

Chart 7: Cumulative Interest Rate Changes around
Announcement Events, Alternative Event Study Parameters0basis points-50-100-150

-200
2yUST

10y
USTBaseline
Source: Bloomberg, Barclay’s Capital

10yAgyAgy
MBS

Baseline + All FOMC

10y
TP

Two-Day Response

10y
SwapBaaIndex

- 12 -Term Premium = α + β Unemp. + γ ∆Core CPI + δ Inf. Dis. + θ Bond Vol. + λ Bond Supply
Bond Supply = [US Treasuries (>1 year maturity) held by private investors]/US GDP
Table 2: OLS Regression of 10-Year Term Premium, January 1985 – June 2008

-2.182***

StdError
0.348-2.324***

StdError
0.349

0.180**
0.307***

0.064
0.056

0.185**
0.298***0.377**

0.131

0.943***
0.044***
0.84
0.36282

Coefficient
Constant
Cyclical Factors
Unemployment Gap
Core CPI Inflation
Uncertainty
Inflation
Disagreement
Realized Volatility
SupplyUnadjusted
Duration-Adjusted
Adjusted R-squared
Std Err of Regression
Number of Obs-1.852***

StdError
0.334

0.063
0.057

0.252***
0.480***

0.070
0.062

0.394**

0.133

0.286*

0.123

0.207

0.994***

0.206

0.944***

0.271

0.009-

0.064***
0.84
0.37282

0.014

0.78
0.43282-

Coefficient

Newey West standard errors (12 lags). ***, **, * denote significance at the 1, 5, 10 percent levels.

Coefficient- 13 -

Table 3: Dynamic OLS Regression of 10-Year Term Premium, January 1985 – June 2008-2.288***Std
Std
Coefficient
Coefficient
Error
Error
0.388 -2.351*** 0.425 -1.879***

Std
Error
0.355

0.222***
0.302***

0.062
0.065

0.219***
0.281***

0.063
0.063

0.283***
0.502***

0.071
0.067

0.458**
0.822***

0.173
0.221

0.454*
0.901***

0.180
0.229

0.292
0.867**

0.152
0.296

0.042***-0.008-0.062***0.014---0.154***0.03-0.151***

0.024-0.116***0.021

CoefficientConstantCyclical Factors
Unemployment Gap
Core CPI Inflation
Uncertainty
Inflation Disagreement
Realized Volatility
SupplyUnadjusted
Duration-Adjusted
Long-Run Properties
Adjustment Parameter1
ADF Test on Coint.
Error2
Number of Obs-6.051***-5.957***-3.441**

282

280

282

Newey West standard errors (12 lags). ***, **, * denote significance at the 1, 5, 10 percent levels.
1. Estimated by regressing the change in the term premium on the contemporaneous change in each explanatory variable and on the lagged level of the cointegration
error.
2. Null hypothesis: no cointegrating relationship- 14 -Table 4: OLS Regression of 10-Year Treasury Yield, December 1986 – June 2008
Std
Coefficient
Error
0.432
0.103

Std
Std
Coefficient
Error
Error
0.443
-0.0130.513

0.403***
0.477*

0.114
0.214

0.424***
0.478*

0.118
0.225

0.742***
0.602*

0.114
0.273

0.127
0.378**

0.208
0.125

0.172
0.342**

0.2100.131

0.784***
0.163

0.198
0.157

0.210
1.057***

0.165
0.25

0.215
1.145***

0.170
0.27

0.111
1.340***

0.187
0.31

0.069***
0.92
0.45
259

0.014
-0.098***
0.91
0.46
259

0.023

0.88
0.53
259

-

Coefficient
Constant
Rate Expectations
Target Fed Funds
Eurodollar Slope
Cyclical Factors
Unemployment Gap
Core CPI Inflation
Uncertainty
Inflation Disagreement
Realized Volatility
SupplyUnadjusted
Duration-Adjusted
Adjusted R-squared
Std Err of Regression
Number of Obs

0.297

Newey West standard errors (12 lags). ***, **, * denote significance at the 1, 5, 10 percent levels.

- 15 -Table 5b: Total Effect of LSAPs on 10-Year Term Premium (bps)
OLS TermPremium
Model52[31 to 74]

Unadjusted[95% CI]
Duration38
Adjusted[95% CI][22 to 54]* Long-run effect.

DOLSTerm Premium
Model*
50[31 to 69]

Yield Level
Model
82[50 to 115]3658

[20 to 53][31 to 84]

Note: As of February 1, 2010, Treasury purchases equaled $169 billion in 10-year equivalents, agency debt purchases equaled $59 billion in 10-year
equivalents, and agency MBS purchases (including unsettled transactions) equaled $573 billion in 10-year equivalents. We assume that the ratio of 10-year
equivalents to unadjusted amounts will be the same for future purchases as it has been for purchases through this date.