Federal Reserve’s Operation Twist

When we talk about the finance, financial market would be one of the most important factors we discuss about. Financial market is like a stage access company to the public to raise capital, and at the same time, it also provides investors an opportunity to join the promising business. Apart from that, financial market is the main tool used by governments to manage their national economy in the market economy countries.

On 10^th February, The Wall Street Journal reported the Federal Reserve’s (it would be short for “fed” in the following part) operation twist attracted attention and discuss in the financial world. In the past year, Fed has spent $400 billion on the long-term national debt to increase the price and decrease the return rate, while, at the same time, they sold the short-term debts in their hands to the market. Long-term debt could be treated as a tool to avoid the risk in depression market, but long-term debt reduces the activity in the market. Since 2008 financial crisis, governments tried their best to enlighten their capital market, thus American Fed input $400 billion to the national debt market to reduce the return rate. In this way, they expect this action could increase the liquidity of the market and leave a positive impression on each investor in the America. However, their action was doubted by the analysts in the market.

Most of the investment banks have been confused with debt price trend. Generally, when the price of long-term debt increases, they should reduce their national debt account to decrease the influence of lower return rate. However, this time, the price of national debt was not decreased for booming economy but the scarcity of the supplies. If this operation twist stop, long-term return rate may be back in a dramatic speed. The market could not give a convinced clue for the investors’ next action. Fed does twist the market! What is more, the hesitation in the market leads an unusual change. In this way, the long-term debt in the market stays low level, and the price of these debts still keep a high price. And this twist could be formed as a bad cycle.

Speaking from my angle, I do not think to use the financial method to conduct the market is clear way to encourage market, compared with to develop the market. It is just like that when you feel cold, your drink alcohol to let you feel warm, however, it would be colder than it before you drink. The better way could be to move up to create heat. So, what do you think “ alcohol” or “ move upon”?