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Basically using more and more extreme measures to keep interest rates down and try to accelerate the recovery. Step 1, bring short-term rates to zero (end of 2

Basically using more and more extreme measures to keep interest rates down and try to accelerate the recovery. Step 1, bring short-term rates to zero (end of 2008) Step 2, (2010) announce that you're going to keep rates near zero for an extended period, and make it increasingly specific (currently through 2015). Since today's 2-year rate is the current 3-month rate compounded with the forward 3-month rates out to 2 years, that has the effect of pushing the yield curve down to near zero out to 2 years. Step 3, (2011) 'Operation Twist', announce that you're buying long-term bonds and selling short-term bonds. That pushes low low rates even further out the yield curve. Step 4 (today) buy mortgages via MBS, directly pushing down mortgage rates relative to Treasurys. Means lower rates for borrowers who can qualify for mortgages/refis. Also lowers credit spreads by taking away an option for people who want to get high rates by taking on credit risk such as mortgages/corporates, pushing lower rates up the credit spectrum. bottom line... low low rates. Europe, China, Japan not doing too well these days, Fed trying desperately to avoid similar fate for US. Generally good for stock markets/startups, if investors can't make high returns in deposits/bonds they're more likely to try to find them in stocks/startups.

cjlars 14y ago
Not exactly. Long terms rates have actually risen* from this announcement. The short term effect is, yes, more demand for treasuries which pushes yield down, but the long term effect is higher inflation, which pushes yields up. Following the same reasoning, this is indeed good for stocks, since there's both a liquidity effect (more money that has to go somewhere) and an inflationary effect (larger future cash flows increase present value) *http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in...
- RockyMcNuts 14y ago
  well, sometimes there are second order effects... The Fed is committing to lower rates to boost the economy... traders say, I think they're going to succeed in boosting the economy...that means some rates should go up! Paradoxically, if people decide that the economy is going to do better, and then they invest and spend more and long rates go up, the Fed thinks 'mission accomplished'. Neverthless, as a first order approximation I would stand by the notion that buying bonds makes their prices go up, rates go down. But yeah, if the policy is successful it will steepen the yield curve.

cjlars 14y ago

Not exactly. Long terms rates have actually risen* from this announcement. The short term effect is, yes, more demand for treasuries which pushes yield down, but the long term effect is higher inflation, which pushes yields up. Following the same reasoning, this is indeed good for stocks, since there's both a liquidity effect (more money that has to go somewhere) and an inflationary effect (larger future cash flows increase present value) *http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in...

RockyMcNuts 14y ago
well, sometimes there are second order effects... The Fed is committing to lower rates to boost the economy... traders say, I think they're going to succeed in boosting the economy...that means some rates should go up! Paradoxically, if people decide that the economy is going to do better, and then they invest and spend more and long rates go up, the Fed thinks 'mission accomplished'. Neverthless, as a first order approximation I would stand by the notion that buying bonds makes their prices go up, rates go down. But yeah, if the policy is successful it will steepen the yield curve.