The Impact of Quantitative Easing on the U.S. Term Structure of Interest Rates

This paper estimates the impact of the Federal Reserve's 2008-2011 quantitative easing (QE) program on the U.S. term structure of interest rates. Different from other studies, we estimate an arbitrage-free term structure model that explicitly includes the quantity impact of the Fed's trades on Treasury market prices. As such, we are able to estimate both the magnitude and duration of the QE price effects. We show that the Fed's QE program affected forward rates without introducing arbitrage opportunities into the Treasury security markets. Short- to medium- term forward rates were reduced (less than twelve years), but the QE had little if any impact on long-term forward rates. This is in contrast to the Fed's stated intentions for the QE program. The duration of the rate impacts increased with maturity up to 7 years then declined, with half-lives lasting approximately 4, 5, 19, 11 and 6 months for the 1, 2, 5, 10 and 12 year forwards, respectively. Since bond yields are averages of forward rates over a bond's maturity, QE affected long-term bond yields. The average impacts on bond yields were 372, 32, 55, 73, and 79 basis points for 1, 2, 5, 10 and 30 years, respectively. These yield impacts are consistent with those estimated in the existing literature, except for the 1-year rate. Our 1-year yield change is significantly greater than that in the existing literature