Fed Experience Shows QE Curbs Yield Outlook, ECB Paper Findsby
Forecasters cut yield projections on QE, forward guidance
Fed’s non-standard policy effects ‘economically important’
The U.S. experience of unconventional monetary policy has shown that it can successfully influence market expectations for bond yields, according to a working paper published on Monday by the European Central Bank.
The report, by Carlo Altavilla of the ECB and Domenico Giannone of the Federal Reserve Bank of New York, studied the effects that professional forecasters expected large-scale asset purchases and forward guidance would have on long-term yields of Treasury bonds and corporate securities. Analysts tended to revise their projections around Federal Open Market Committee policy announcements, with “statistically significant and economically important effects” on U.S. Treasury and corporate bonds, the paper found.
“Forecasters expected bond yields to fall significantly in response to the accommodative actions undertaken by the FOMC in response to the financial crisis,” the authors wrote. “They also projected the decline to be persistent, lasting for at least one year.”
The paper comes less than two weeks before the ECB’s Governing Council meets to decide whether to adjust its own unconventional policies in response to the fallout from the U.K. decision to quit the European Union. Officials are buying 80 billion euros ($89 billion) a month in debt, lending funds to banks at potentially negative rates of interest, and have pledged to keep rates low until inflation is back on track toward its goal of just under 2 percent.
Rate-setting was a standard policy tool used by the Fed prior to the 2008 collapse of Lehman Brothers. Once rates were pushed close to zero, the U.S. central bank supported consumption and investment by exerting downward pressure on bond yields through non-standard measures.
Those measures “helped create a favorable environment for long-term funding,” had a considerable impact on asset prices, and substantially lowered the cost of market financing, the ECB paper showed. Forward guidance has likely empowered the other non-standard policy packages, possibly strengthening some of their channels of accommodation, the authors wrote.
The ECB’s Governing Council is scheduled to set monetary policy on Sept. 8 in Frankfurt.