Pressure 04 · Quantitative tightening
Does the design of QT matter?
The model compares two policies calibrated to reduce Fed demand by $10 billion at baseline conditions: passive runoff and proportionally weaker Fed demand responses to yields and macroeconomic conditions.
Two policy counterfactuals
The counterfactuals differ in expected future Fed demand.
Passive runoff lowers the baseline level of Fed demand while leaving its estimated responses to yields and macroeconomic conditions intact.
Weaker expected Fed support, called “rule erosion” in the paper, proportionally scales down those estimated responses. Because long-term yields depend on expected future demand, this channel matters more farther out the curve.
Future Fed demand is a model scenario.
Weaker expected Fed support is a policy counterfactual, not a separate estimate of investors’ historical beliefs. Actual expectations may lie between the two cases.
Interpretation
At the long end, the weaker-support effect is much stronger.
At 15 years, weaker expected Fed support produces a 1.55 bp yield response, about 1.6 times the 0.96 bp response under passive runoff. Long yields reflect expected future Fed demand, so weakening the Fed’s responses to yields and macroeconomic conditions compounds over the horizon. Passive runoff primarily changes the current level of holdings.