The released Federal Reserve’s decision on the 21th of September to purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell the same amount of Treasury securities with remaining maturities of 3 years or less by the end of June 2012, called as operational twist shrank equity markets, dropped market value of corporations and slashed wealth of investors. The Federal Open Market Committee intended to support stronger economy growth by pushing down long term interest rates those could stimulate borrowing. In the judgement of the stock markets, the Committee approved economic recession. However, do slumped stocks markets equivalent to the state of economy?
A yield curve which is a benchmark for banks to determine interest rates on loans is a prime indicator in financial decisions. If it is expected that the term structure of the US interest rates become more flat and long term interest rates fall in the future companies will not be willing to take long term loans at the present. Borrowers would better choose a short term loans and take new loans only after the long term rates fall down. Moreover, yields of the US Treasury securities are already relatively low.
In general financial transactions are zero NPV and additional value is created by the choice of assets’ allocation but not by the choice of financial recourses or financial securities. Thus, the decision to change the portfolio of the Federal Reserves’ assets and the meltdown of the stock markets do not have direct effect on the GDP growth.
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