The Federal Reserve Bank of New York today released The Case for TIPS: An Examination of the Costs and Benefits, an article forthcoming in the Bank's Economic Policy Review series.
Authors William C. Dudley, Jennifer Roush and Michelle Steinberg Ezer argue that the ex ante costs of Treasury Inflation-Protected Securities (TIPS) issuances are about equal to the costs of nominal Treasury issuances and that TIPS provide meaningful benefits to investors and policymakers.
The authors explain that some studies have found that the issuance of inflation-indexed debt has not been as cost-effective for the U.S. Treasury as the issuance of nominal securities. The studies base their conclusions on what is known as ex post analysis—that is, they look back from the actual inflation outcome to determine whether TIPS issuance costs exceeded the costs of nominal Treasury issuances of similar durations.
Dudley, Roush and Steinberg Ezer observe that the ex post approach has disadvantages when it comes to assessing the costs and benefits of TIPS over the long run. They recommend instead an ex ante approach, in which such costs and benefits are calculated according to an anticipated inflation outcome over the life of the security at the time of the auction. The authors add that a comprehensive analysis of TIPS should also consider the program’s other, more difficult-to-quantify, benefits—especially when cost analysis reveals TIPS to be only marginally more expensive or about as expensive as nominal issuances.
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, was executive vice president and head of the Bank’s Markets Group when the article was written; Jennifer Roush is chief of the Monetary and Financial Market Analysis Section of the Board of Governors of the Federal Reserve System; Michelle Steinberg Ezer is a senior trader/analyst in the Federal Reserve Bank of New York’s Markets Group.
The views expressed in the article are those of the authors and do not necessarily reflect the position of the Federal Reserve Board or the Federal Reserve Bank of New York.