Liquidity Facilities: Evidence from High-Frequency Identification

This paper constructs a novel high-frequency liquidity news surprise to identify the effects of Federal Reserve liquidity facility announcements during the Global Financial Crisis and COVID-19 pandemic. Using local projections, we show that liquidity facility announcements substantially lower long-term Treasury yields, with a one percentage point expansionary surprise reducing 10-year yields by approximately 0.2 percentage points. This effect operates almost entirely through term premia rather than expected future short rates. Inconvenience yields on treasury securities fall substantially and primary dealers increase their relative holdings of Treasuries. Our findings demonstrate that liquidity facilities represent an effective tool which reduces risk premia during financial crises.