Analyzing Federal Reserve asset purchases: From whom does the Fed buy?

Abstract

Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the policies. Several papers provide evidence that these programs do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. We exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households, with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets.Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.

Transmission of Quantitative Easing: The Role of Central Bank Reserves

“…The circum-stances surrounding these programs, however, make the existence of some reserve-induced effects likely. Carpenter et al (2015) conclude that the ultimate sellers of assets to the Federal Reserve in connection with its QE programs were non-banks. Moreover, Ennis (2014) illustrates how U.S. banks now hold a substantially larger amount-around 50 percent-of their securities and liquid asset portfolio in reserves compared to the years before the crisis (see also Ennis and Wolman, 2015).…”

The True Nature of the Portfolio Balance Channel of Quantitative Easing Policy

“…Many existing studies dealing with portfolio allocations analyze different economies than the Eurozone, e.g., Joyce, Liu and Tonks (2014) for the UK, Carpenter et al (2013) and 2015for the US or Hogen and Saito (2015) for Japan. Joyce, Liu, and Tonks (2014) examined how the BoE asset purchase programme affected via the portfolio balance channel the investment behavior of insurance companies and pension funds.…”

“…Their counterfactual analysis is based on explanation of portfolio allocations by variables invariant to the QE monetary policy and their results suggest that QE of the BoE led institutional investors to shift their portfolios away from government bonds towards corporate bonds. Carpenter et al (2013) and 2015examined the Federal Reserve's asset purchase programme and on the flow of funds data assessed the types of investors that were selling assets to the FED and their portfolio adjustments after these sales. Their goal was to uncover possible effects described by the preferred habitat theory and the transmission of unconventional monetary policy across asset markets.…”

A Portfolio Model of Quantitative Easing

“…The question about the counterparties to the Federal Reserve's QE programs is addressed in Carpenter et al (2015). They analyze data on U.S. financial flows of funds and find that the Fed's purchases are mainly associated with reductions in the holdings of the targeted types of assets by nonbank entities, predominantly households, hedge funds, broker-dealers, and insurance companies.…”