QE3 and Yield Curves

Alex Tabbarok suggests that the recent Fed Statement may have had the same impact on the yield curve as a QE3 of about $760 billion.  As Justin Wolfers explains:

Many market commentators are disappointed that the Fed didn’t announce “QE3”—a renewed round of quantitative easing. But they shouldn’t be. The Fed still chose to reduce long-term interest rates, they just decided to do it with a different tool. They figured that if you can’t reduce short-term interest rates further, you should reduce ‘em for longer. That’s what the Fed was promising, when they said they expect to keep their short-term rate at “exceptionally low levels for the federal funds rate at least through mid-2013.” What does this do? Keeping short-term interest rates lower for longer will also reduce long-term interest rates. And that’s the main game.

Emphasis added.  Recent movements in the yield curve suggests this happened as described.  Although recent trends in the equity markets seem to suggest… nevermind, I’m done trying to figure out what’s going on in the equity markets.

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About brianbergfeld
I am an economics PhD student at Washington University in St. Louis.

2 Responses to QE3 and Yield Curves

  1. Adam says:

    I hate to bring up the equity markets, but could the reduction in long-term rates be the result of the massive buying of treasuries following the massive sell-off of equities that was triggered by the announcement that treasuries now carried a higher risk of default, driving investors to put more money into them because.. um …default risk …. and …um …credit crunch … debt crisis…. economy?

    Kidding aside, the question regards the timing of the fall in long-term yields – was it before or after the Fed announcement?

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