We can summarize the implications of that forecast in terms of the following scenario. Suppose that the Federal Reserve were to sell off all its Treasury securities of less than one-year maturity, and use the proceeds to buy up all the longer term Treasury debt it could. For example, in December of 2006, this would have required selling off about $400 B in bills and notes or bonds with less than one year remaining, with which the Fed could have effectively retired all Treasury debt beyond 10 years. The figure below summarizes the implied average change in forecast for the 1990-2007 period as a result of this change for interest rates of various maturities. Yields on maturities longer than 2-1/2 years would fall, with those at the long end decreasing by up to 17 basis points. Yields on the shortest maturities would increase by almost as much. While our estimates imply that the Fed could make a modest change in the slope of the yield curve, it would not make any difference for the average level of interest rates.
Note Hamilton clearly states that the Fed could clearly lower rates further. As Scott Fulwiler commented via e-mail:
They just have to announce the rate they want and be willing to buy everything offered at that price. Since the real point of QE2 is to cut longer-term rates, the only conclusion is that they don’t understand the fundamental fact that their operations are about price, not quantity.
Also, Hamilton’s evidence should work in reverse–i.e., don’t fear the Chinese dumping all their lt Treasuries . . . 17bp for every $400B.
I’d love to see a study that parses out the impact of Fed announcements. It might be that talk really is cheaper than action.