Federal Reserve announced the recovery policy called 'Operation Twist' in order to solve the US Debt crisis.
The main objective of this policy is to decrease the interest rates. What will happen if interest rates became low..???
When interest rates became weak, more people will borrow money and thus more capital flow will be pumped into the economy. As a result of this the overall growth of the economy will take place, the corporate profits will be increased, more and more opportunities will flow into the system and thus the unemployment issue in the US will overcome.
When we consider the following figures of US, we will get a clear picture.
GDP: 1.60 percent
Interest rates: 0.25 percent
Inflation rate: 3.60 percent
Jobless rate: 9.10 percent
Here the GDP rate of US is too low compared to EMEs like India and China. For India GDP on YoY basis is 7.80 percent and for China it is 9.70 percent. Also the jobless rate for US is also high.
But the positive note for US is their inflation rate. Their inflation rate is much lower compared to India and China.
In US, the interest rate for 10 year treasuries is 1.95 percent. This figure seems pretty interesting. This is lower than the inflation rate.
So what they are trying to do with the Operation Twist..?? This can be explained like this.
The Fed already owns $1 trillion bonds. They purchased this in the fast few years in order to bring down the medium and long term interest rates.
Among these, a lot of bonds especially medium term bonds will become expire in the coming years.
When we observe the interest rates of these bonds, they are almost Zero.
So the Fed will sell some of these medium term bonds and they will buy longer term bonds, such as 10 year to 30 year treasuries.
This is the main idea behind the Operation Twist.
The main objective of this strategy is to lower the interest rates further and thus boosting the economy by pumping more capital in to the system.
Regards Hari " लोका समस्ता सुखिनो भवन्तु "
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