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In his post-Federal Open Market Committee meeting press conference, Fed Chair Jerome Powell noted the panel discusses yield curve control in addition to forward guidance and asset purchases.
Many observers expect the Fed to move to yield curve control in September. In doing so, the Fed would cap interest rates for certain maturities — and the belief is it would be mostly shorter-term securities at first — and buy as much as needed to keep yields from rising above the stated top limit.
“I expect YCC to be an active part of the Fed’s toolkit on two fronts,” said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. First, “as a way to cement forward guidance on the front end of the curve and provide the Treasury an incentive to skew issuance towards bills/short-term notes in funding the 2020-21 deficits,” and secondly, “as an option to cap long end yields in the event of a disorderly steepening of the Treasury curve.”
Yield curve control is being discussed because “the neutral rate has most likely continued to decline and the Fed is unwilling to use negative Fed funds to chase it.” With the funds rate target not an option, leaving forward guidance and quantitative easing as the most likely Fed tools “for the foreseeable future unless we transition to a high inflation regime,” Al-Hussainy said. Such a transition is “unlikely” in the coming two to three years.
While the Fed has said it discussed yield curve control, Steve Skancke, chief economic advisor at Keel Point, noted, “With interest rates along the yield curve all being low, and within a likely FOMC target range, there is no need to use another FOMC policy tool...