The Federal Reserve's Portfolio and its Effect on Interest Rates

Jeff W. Huther, Jane E. Ihrig and Elizabeth Klee
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Jane E. Ihrig: https://www.federalreserve.gov/econres/jane-e-ihrig.htm

No 2017-075, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums are lower. In addition, at the individual security level, differences in Federal Reserve holdings from overall Treasury debt outstanding are correlated with measures of pricing errors and liquidity premiums. We discuss the mechanism for this effect, which could include elements of preferred-habitat theory as well as the fiscal theory of the price level.

Keywords: Federal Reserve; SOMA portfolio; Treasury securities; Portfolio composition (search for similar items in EconPapers)
JEL-codes: E42 E52 N12 O23 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2017-07
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-75

DOI: 10.17016/FEDS.2017.075

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