The benefits of yield curve control
If bringing short-term rates to zero isn’t enough the Fed has the option of yield curve control (YCC): i.e. the Fed would target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy.
- The Bank of Japan (BOJ) committed in 2016 to peg yields on 10-year Japanese Government Bonds around zero percent, in a fight to boost persistently low inflation. To hit that yield target, the BOJ has a standing offer to purchase any outstanding bond at a price consistent with the target yield. On days when private investors for any reason are less willing to pay that price, the BOJ ends up purchasing more bonds in order to keep yields inside the target price range. Since the initiation of YCC, however, the BOJ has purchased government bonds at a slower pace showing that credible YCC policy can be more sustainable for central banks than a quantity-based asset purchase program.
- Australia’s central bank adopted a form of YCC in March 2020, in response to the coronavirus, and is targeting a three-year government bond yield of 0.25 percent.
- As far as the US is concerned, recent research suggests that pinning medium-term rates to a low level once the federal funds rate hits zero would help the economy recover faster after a recession. In particular, YCC could bring the unemployment rate down much faster early in the recovery. If investors believe the Fed will stick to the peg, the Fed could achieve lower interest rates without significantly expanding its balance sheet.
What is yield curve control?
By: Sage Belz, David Wessel – Brookings
The Federal Reserve’s Current Framework for Monetary Policy: A Review and Assessment
Authors: Janice C. Eberly, James H. Stock, Jonathan H. Wright
From: Northwestern University, Harvard University, Johns Hopkins University
