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The Effect of the Fed's Large‐Scale Asset Purchases on Inflationary Expectations

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  • Willem Thorbecke

Abstract

In 2008 U.S. demand collapsed and triggered deflation. The Fed employed large‐scale asset purchases (LSAP) to fight deflation. How did news of LSAP affect inflationary expectations? If investors believed that LSAP would raise inflation, they would sell assets exposed to inflation and purchase inflation hedges. This would lower the prices of assets that are harmed by inflation and raise the prices of assets that benefit from inflation. Examining the relationship between asset price changes and inflation sensitivities can thus shed light on how financial markets process LSAP news. Results across 60 assets indicate that initially LSAP announcements lowered expected inflation. Only as inflation approached its target did news of LSAP raise expected inflation.

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  • Willem Thorbecke, 2018. "The Effect of the Fed's Large‐Scale Asset Purchases on Inflationary Expectations," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 407-423, October.
    • Handle: RePEc:wly:soecon:v:85:y:2018:i:2:p:407-423
    DOI: 10.1002/soej.12273
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    Cited by:

    1. Willem THORBECKE, 2018. "Nonfarm Employment, Inflationary Expectations, and Monetary Policy after the Global Financial Crisis," Discussion papers 18076, Research Institute of Economy, Trade and Industry (RIETI).
    2. Willem Thorbecke, 2021. "Non-traditional monetary policy and the future of the financial industries," International Journal of Economic Policy Studies, Springer, vol. 15(1), pages 5-21, February.

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