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Examines influences of Federal Reserve actions on inflation expectations through Treasury markets, suggesting important implications for economic forecasting.
We examine how Federal Reserve actions in Treasury markets shaped market-based measures of long-term inflation expectations from 2018 through 2024. Using daily breakeven inflation (BEI) rates at five- and 10-year horizons, we compare QE4 with the periods immediately before and after. During QE4, BEI exhibited heightened volatility and a breakdown in the usual correlation between nominal and real yields. Fed purchases of nominal Treasuries significantly reduced BEI, while TIPS purchases raised it. These effects are robust across data frequencies, indicating that BEI during QE4 reflected Federal Reserve balance sheet composition rather than solely market-driven expectations.
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Allen et al. (2026) studied this question.
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