The Longer-Term Effects of Quantitative Easing on Yields and Asset Prices

Abstract

Upon reaching the effective end of conventional monetary policy, the Zero-Lower Bound, the Federal Reserve Board began to utilize a non-conventional expansionary monetary policy involving Large Scale Asset Purchases. Under this policy, large quantities of agency and federal debt is purchased using the reserves of the Federal Reserve Bank’s balance sheet. This policy is frequently referred to as Quantitative Easing or, more simply, QE. This paper considers the effects and sustainability of the Federal Open Market Committee’s use of Large Scale Asset Purchases on the prices and yields of financial assets within the U.S. Financial Markets. Our analysis presents evidence that while QE was initially effective in lowering the yields of agency and federal debt, the downward pressure on yields was not sustainable over time. Additionally, we find that the effects of QE spilled-over into additional asset classes within the financial markets including corporate fixed-income and equities.