MNI EXCLUSIVE: Fed Dials Down Yield Curve Control Expectations

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve sees little justification for

short-end yield caps with borrowing costs near record lows but hasn't ruled out

using the tool as a limited accessory to forward guidance, according to

interviews with current and former Fed officials.

     Divisions among FOMC officials about how long the recovery will take may be

one reason tools like curve control remain in the background, said Nathan

Sheets, former international finance division director at the Fed Board.  Noting

the wide range for GDP growth for 2021 of -1% to +7% in the June SEP, he said:

"The committee is not yet crystalized in what exactly the right response is

before jumping in with both feet," Sheets said.

     YCC "remains on the table," even if current low rates aren't expected to

surge in the next few months, Sheets said. Curve control can be seen "as an

extension of communication policies," he added. "It is a way to complement

forward guidance and asset purchases for some time."

     --JUDICIOUS SKEPTICISM

     Officials have signaled near-zero policy rates will remain for years until

a recovery is firmly in place, so the dilemma is what to do through that

prolonged comeback if yields surge and choke economic growth. 

     Fed Chair Jerome Powell told Congress last week the FOMC's study of

yield-curve control was at an early phase and no decisions had been taken. Other

Fed officials have offered similar views after their June meeting suggesting

they are not ready to implement curve control now.

     "There is a difference between a sort of modest, gradual increase of

intermediate and longer-term rates and a jump, or a surge, in longer-term

rates," former Minneapolis Fed President Gary Stern told MNI. "It's the latter

that is much more likely to grab the Fed's attention."

     "The evidence on pegging interest rates is mixed," Stern said. "A little

bit of judicious skepticism is in order."

     --EFFECTIVENESS LIMITED

     Doubts around the effectiveness of curve control resemble the misgivings

over negative interest rates, another idea Powell has downplayed, citing the

international record. 

     A New York Fed analysis published this week of Japan's commitment to

keeping the 10-year yield at around zero concluded that the policy framework was

"seemingly not" a success on the inflation front and "the jury is still out"

over whether it helped the BOJ achieve its policy goals. 

     Dallas Fed leader Robert Kaplan said June 15 that he was wary of creating

market distortions and dampening price signals. "I'm in the stage, for me, of

having a little skepticism but wanting to continue to explore it," he said.

     Curve control could be a "little helper," but forward guidance and QE are

the Fed's go-to tools at the zero lower bound, Mary Daly of the San Francisco

Fed, who becomes an FOMC voter next year, said at a separate event on June 15.

     Even before the pandemic, Fed Governor Lael Brainard cited advantages of

yield caps while pointing to the "lumpiness" of initiating and rightly

calibrating asset purchases, decisions she said can be "costly."   

     The Fed has already taken several unprecedented policy leaps to fight

Covid-19 including loans to "Main Street" backed by Congress, swelling the

balance sheet to a record size of USD7 trillion. 

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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