Can Central Banks Target Bond Prices?
This paper addresses the possible role of bond prices as operating or intermediate targets for monetary policy. The paper begins with a brief review of the mechanisms through which a central bank could, in theory, influence long-term interest rates, and continues with a brief narrative overview of debt management policies in the U.S., tracing their effects on the maturity distribution of outstanding publicly-held Treasury debt and the composition of the assets held by the Federal Reserve System. The empirical section presents new econometric evidence on the effects of these policies on expected excess holding returns ("term premia"), demonstrating that changes in the Fed's holdings of long-term securities have had statistically significant and economically meaningful effects on the term premia associated with Treasury securities with maturities in the two- to five-year range.
I am grateful to Toshiki Jinushi for helpful discussions; to Ehung Gi Baek, Ben Friedman, Brian Sack and Ellis Tallman for detailed comments on an earlier draft; and to my former colleagues at the Federal Reserve Bank of New York, especially Tony Rodrigues, for ideas that contributed to this paper.