Higher Short-Term Rates, with a Twist
Against a backdrop of declining US growth projections, all eyes were on the Fed last week as they considered new policy initiatives designed to impact the cost of borrowing. Under consideration was the QE3 balance sheet expansion, as well as more politically palatable options, such as reducing the interest rates paid on excess reserves held by the Fed and a maturity asset swap otherwise known as “Operation Twist.”
To help ease the deleveraging process, the Fed continues to adopt policy initiatives that reduce private sector borrowing costs with the lowest potential of creating collateral inflation effects. Operation Twist, as announced by the Fed on September 21, will not expand the Fed’s balance sheet as QE2 did, but it may lower long-term borrowing costs like QE2 by impacting the supply and demand characteristics of the yield curve.
Under Operation Twist, the Fed plans to buy $400,000,000,000 of long-dated Treasuries, which will be financed by the sale of an equal amount of bonds with maturities of three years or less. The eventual impact of Operation Twist largely will depend on whether bank lending activity increases due to the lower rates created by the program. Given the immense scope of Operation Twist, we thought this month’s research should investigate the program and look at its potential impact on corporate treasurers.
Best Regards,
Ben Campbell
President & CEO
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