Test of a quadratic relationship between the yield of TIPS and the federal funds rate

Abstract

This article examines the potential impacts of monetary policy on the yield of Treasury inflation-protected securities (TIPS). A quadratic relationship is confirmed for all four types of TIPS. It suggests that Fed easing would not lower TIPS yields when the federal funds rate is below certain critical values whereas Fed tightening would raise TIPS yields when the federal funds rate is greater than certain critical values.