The Effect of the Fed’s Large-scale Asset Purchases on Inflation Expectations

Abstract
In 2008, U.S. demand collapsed and triggered deflation. The U.S. Federal Reserve (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 exposed to 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. The results indicate that initially LSAP announcements lowered expected inflation. Only as inflation approached its target did news of LSAP raise expected inflation.

Creation Date/NO. July 2017 17-E-097
Research Project East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances