Question

Suppose that following a policy meeting in early 2020, the Federal Reserve made an announcement that it would purchase up to $300 billion of longer-term Treasury securities over the following six months. What effect might this policy have on the yield curve?

Answer 1

When Fed announces that over the next six months would buy up to $300 billion worth of longer-term Treasury securities it tend to increase the price and push down longer-term rates of interest on all types of loans. When the yield falls the yield curve would shift down, however it on mostly on medium- and long-term maturities. Thus it is likely that the yield curve would become flatter or possibly inverted. The flat yield curve refers depicts no or little disparity between short-term and long-term rates of interest; and inverted yield curve depicts that the interest rates on short-term loans exceeds than the long-term loans