Get ready for the Federal Reserve to target bond yields as one of the many unprecedented measures the central bank has undertaken to support the economy.
The Fed may shift to a policy of buying bonds to cap yields for short-dated maturities at fixed levels, says Mark Cabana at BofA Global Research who argues the move is likely to take place in September as the Fed looks to mitigate the risk of deflation over the next few years.
The new policy may result from worries that the Fed currently lacks tools to support economic growth when policy interest rates are near zero anyway after the central bank moved aggressively to combat the recession resulting from the coronavirus pandemic.
In an interview with MarketWatch, the former New York Fed staffer, now at BofA, noted this so-called policy of yield-curve control hasn’t seen much use by other monetary policymakers. Only Australia and Japan have adopted the unconventional policy measure, so far.
Once viewed as an outlandish option only used by deflation-stricken Japan, yield-curve control has come up in recent discussions among senior Fed officials.
The minutes from the April meeting of the Federal Open Market Committee, the Fed’s interest-rate setting body, showed some central bank officials raised the possibility of its use. And New York Fed President John Williams and Fed Governor Lael Brainard have both come out in support of the policy.
Cabana says yield-curve control is likely to come in conjunction with forward guidance that interest rates will be kept low until certain inflation targets are hit to prevent investors from thinking that the Fed will tighten monetary policy at the first sign of price pressures resurfacing.
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