The Signaling Channel for Federal Reserve Bond Purchases


Glenn D. Rudebusch

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2011-21 | April 1, 2013

Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short-term interest rates. Our evidence comes from a model-free analysis and from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider bias-corrected model estimation and restricted risk price estimation. In comparison with other studies, our estimates of signaling effects are larger in magnitude and statistical significance.

Article Citation

Rudebusch, Glenn D., and Michael Bauer. 2011. “The Signaling Channel for Federal Reserve Bond Purchases,” Federal Reserve Bank of San Francisco Working Paper 2011-21. Available at

About the Author
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Michael Bauer is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco and research fellow at CEPR. Learn more about Michael Bauer