I think we will never have a solid answer for how much QE impacted rates. I heard on Marketplace on NPR a claim that there was a Fed report showing QE had a 1% impact on rates. The paper I find they may be referring to is, to be honest, dense. But the net result, as I understand it, is they are arguing that it is not the level of the Fed’s holdings it is the composition of the portfolio, i.e. the individual securities the Fed is purchasing (or not) which impacts price.
On the level: “Against that backdrop, therefore, the overall effect is modest; on a historical basis, actions to build up SOMA did not have large effects on market pricing.”
On the composition: “As reported in table 10, similar to the market neutrality results, we see significant effects of individual securities holdings on measures of market liquidity. In particular, our coefficients suggest that pre-crisis, holdings consistent with a more liquid portfolio were associated with a higher bid-asked spread”
Now this all may be econometric garbage but it pretty much exactly lines up with what you have been saying for many years. To give my interpretation of the paper: “The level of Fed SOMO holdings doesn’t have much impact because the private sector is just exchanging one very liquid asset for an ever more liquid asset. The particular choice of securities the Fed purchases does impact how market participants view the desirability of certain securities which results in these being mis-priced”
The bottom line is there are arguments and data which suggest QE had some effect but perhaps only because of composition. Taken together this would indicate, as I think his highly probable, unwinding QE by letting securities mature (i.e. not making trading decisions), will have very little impact on the market.
I would guess this will be your thinking as well. Correct?
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