Question

If the FED were to use the monetary policy tools at its disposal to decrease the yields (interest rates) on U.S. Treasury Bills, Notes, and Bonds, will this result in a change in the prices of stocks? If so, up or down, and why? Thoroughly explain your answer.

Answer 1

We know that there exists a negative relationship between rate of interest in the economy and price of bonds, stocks and Treasury Bills, Notes. Thus, if Fed uses a policy to decrease yields by purchasing government bonds in the open market, then demand for bonds will increase and as the demand for bonds, stocks, TBs increases, the demand curve will shift rightwards leading to increase in the price of bonds, stocks. The case remains same for U.S treasurey Bills, Notes and Bonds.Thus, if yields on the bonds decreases, then price of stocks will increase.