How Quantitative Easing Actually Works
A favored Fed tool in times of stress meaningfully cuts the cost of private debt.
How Quantitative Easing Actually WorksEffects of the Federal Reserves Repo Market Interventions on Liquidity and Testing the Portfolio Rebalancing Channel of Quantitative Easing
, Assistant Professor of Finance
The Federal Reserve has conducted significant interventions in the repo market, but the consequences of these interventions for market outcomes are unclear. I investigate the response of institutional investors to the Federal Reserve’s Overnight Reverse Repurchase (ON RRP) facility and the consequences for market functioning. Money-market funds (MMFs) have majorly increased their usage of the facility but were traditionally important cash lenders in the private repo market, providing financing to dealers. This financing is critical for dealers’ market-making activities, including those in the Treasury market. Using detailed data on MMFs’ holdings, I investigate the effect of the displacement of private repo financing for Treasurys due to the uptake of the ON RRP facility on liquidity in the
Treasury cash market. The GovPX Intraday data would allow me to construct various high-quality liquidity measures for the Treasury cash market to investigate this further.