Media Briefings


  • Published Date: November 2012

The beneficial impact of the Federal Reserve’s programmes of purchasing longer-term assets on longer-term US Treasury yields has largely happened through what are known as the scarcity and duration channels. That is the central conclusion of a study by a team of Fed researchers, published in the November 2012 issue of the Economic Journal.

The scarcity channel is a mechanism by which Fed purchases of assets with a specific maturity lead to higher prices (and lower yields) of securities with similar maturities. The duration channel is a mechanism by which the removal, by means of Fed purchases, of aggregate duration from the outstanding stock of Treasury debt reduces term premiums on securities across maturities.

The Fed’s traditional monetary policy instrument, the federal funds rate, was brought near to zero in December 2008. As a consequence in the years since then, the Fed has used its balance sheet as an additional tool for providing policy accommodation and pursuing its objectives of maximum employment and price stability.

The Fed’s balance-sheet policy accommodation has largely been implemented via the acquisition of longer-term assets, including Treasury securities, through such measures as the large-scale asset purchase programmes (LSAPs) between 2008 and 2011. This study looks at the Fed’s purchases of longer-term Treasury securities from the perspective of the strategy and transmission mechanism of monetary policy.

The research clarifies the role of LSAPs in the broader context of monetary policy strategy, linking the recent LSAPs to earlier episodes in which the Fed has undertaken operations in longer-term securities markets, including the 1940s and the 1960s.

The discussion also traces the historical evolution in the post-war period of academic and Fed views about the effectiveness of monetary policy actions that are concentrated in longer-term assets. These operations contrast with the more conventional kind of monetary policy operations in shorter-term securities.

To explain the transmission mechanism, the authors lay out the main channels through which LSAP-type monetary policy operations are believed to affect longer-term interest rates. Different theoretical perspectives emphasise different channels.

The authors concentrate on two channels: first, the scarcity channel associated with the traditional research literature on ‘preferred habitat’; and second, the duration channel associated with the general notion of interest rate risk. They provide empirical estimates of the effects associated with these channels on longer-term Treasury yields.

The results indicate that the impact of LSAP-style operations on longer-term interest rates is mainly felt on the term premium component, rather than on the separate expectations component that embodies the expected path of future short-term interest rates.

The estimates suggest that the scarcity and duration channels have both been of considerable importance in producing the effects of the purchases on longer-term Treasury yields. Through these channels, the LSAPs appear to have been successful in providing extra policy accommodation.


Notes for editors: ‘The Federal Reserve’s Large-Scale Asset Purchase Programmes: Rationale and Effects’ by Stefania D’Amico, William English, David Lopez-Salido and Edward Nelson is published in the November 2012 issue of the Economic Journal.

The authors are at the Federal Reserve Board in Washington DC.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email:; Stefania D’Amico on +1-202-452-2567 (email: stefania.d’; or Edward Nelson via email: