Yield curve control debate continues

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The Federal Reserve acted aggressively when the coronavirus pandemic hit the United States, cutting rates to the zero lower bound, and vowing to do everything in its power to help the economy. Two tools at its disposal have received the most chatter— yield curve control and negative interest rates.

The Fed has said negative rates would be a last resort, but noted after its latest meeting that it had discussed yield curve control. Many observers expect the Fed to implement the policy as early as September.

John Kaprich, investment director at Aware Asset Management, does not think the Fed will use YCC anytime "in the near future."

The Fed hasn't explicitly ruled it out, “because then that creates doubt that they won’t do whatever it takes to help,” he said. “There is not a lot of confidence about how effective YCC would be and I don’t think it’s very likely" the Fed will use it.

“The Fed has done a lot already.”

John Kaprich, investment director at Aware Asset Management.

A recently published economic bulletin from the Federal Reserve Bank of Kansas City, also suggests YCC could be avoided.

"Forward guidance about future interest rates could deliver much, though not all, of the accommodation of yield curve control," wrote Brent Bundick and A. Lee Smith, research and policy advisors at the Federal Reserve Bank of Kansas City.

They note the “overlap” between forward guidance and YCC. “In targeting rates at a specific time horizon, yield curve control explicitly ties monetary policy to a date on the calendar, similar to date-based forward guidance, which the Committee has used many times during the last decade.”

One issue with yield curve control, they write, is it could link monetary and fiscal policy, which could threaten central bank independence.

If the Fed doesn't implement YCC, “unexpected changes in the supply of government debt can influence Treasury yields.”

Further monetary policy accommodation, they write, could result from “forward rate guidance and yield curve control, or perhaps a combination of the two tools."

As for negative interest rates, “The markets are saying it’s no longer on the table .... implementing NIR creates other problems,” Kaprich said. “The last thing Fed wants to do, is create more problems. They've got enough to worry about. They are dealing with something that could change overnight, the virus is so fluid.”

The Fed has and is doing "everything they can," he said.

With some stimulus programs scheduled to end, he said, he expects extensions.“We are not at the point where we can exit some of the programs, things are not that good,” he said. “The Fed will continue to do what they need to do, for as long as they need to. I'm not expecting to see any changes or stoppages from the programs, as they are fighting an enemy they don’t know anything about.”

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