Covid-19 and Quantitative Easing: An Event Study of Federal Reserve Policies During the Covid-19 Recession

Abstract

We evaluate here the effects caused by the the Federal Reserve's Quantitative Easing (QE) program and its other monetary policy programs undertaken the height of the COVID-19 Recession on long-term fixed-income securities and other financial assets. We utilize an event-study methodology first laid out in Fama, Fisher, Jensen, and Roll (1969) and expanded upon in multiple other pieces of scientific literature published following the first rounds of QE programs between 2008 and 2015. The methodology focuses on identifying the change in the market made on the day of and day(s) following the selected events where the events are largely announcements of Federal Reserve policy or action. We examine the effects of these events on fixed-income securities such as Treasury securities, corporate bonds, and TIPS. We compare these effects with those found by similar studies following the actions of the Federal Reserve after the Great Recession to see how, if at all, market response differed and find that, overall, the response of fixed-income markets was more muted than the response to earlier rounds of QE undertaken by the Federal Reserve, even though the magnitude of the most recent round was much greater. Despite smaller overall changes, we still find statistically significant reductions in the yields of U.S. Treasuries and high-rated corporate bonds, with low-rated corporate bonds seeing a statistically significant increase in yields. We then expand the scope of the study to compare the effects of Federal Reserve action to that of other important economic events taking place during the turbulent months in spring 2020 to address how much of an effect the actions of the Federal Reserve had when compared to other major influences. We find that the continued spending of the Federal Reserve was not enough to maintain downward pressure on bond yields in the face of economic recovery and that inflation pressures rose as the economic recovery continued and the Federal Reserve did not reduce its spending. We then analyze the volatility of the daily difference in yield for U.S. Treasuries and corporate bonds using a GARCH model and find reductions in volatility following Federal Reserve action.