Yield Curve Control Coming Soon

Posted June 27, 2020

The Fed is likely to adopt Yield Curve Control as its primary policy tool to manage the level of interest rates in the United States.  The latest Macro Watch video explains what Yield Curve Control is and how it differs from Quantitative Easing.

It also discusses the impact that Yield Curve Control could have on the financial markets and the economy.

There are three reasons the Fed is likely to move to Yield Curve Control at some point during the months ahead:

• To provide greater assurance to the business community that interest rates will remain low for an extended period of time, in order to encourage more investment;

• Adopting a policy based around Yield Curve Control would help obscure the fact that the Fed is creating trillions of dollars in order to finance the government’s enormous budget deficits at low interest rates; and

• By using Yield Curve Control the Fed may not have to create as much money to hold interest rates down as it would have to do if it sticks with its current policy of Quantitative Easing.  If successful, Yield Curve Control would, thereby, reduce the risk of the Fed creating an out of control stock market bubble.

The Bank of Japan pioneered Yield Curve Control, along with most of the rest of the monetary policies that have been employed by all the major central banks thus far during this century.  This video examines how Yield Curve Control has worked in Japan since it was introduced in 2016.  The effectiveness of this policy in Japan makes it more likely that the Fed will once again follow the BOJ’s lead and introduce Yield Curve Control in the United States.

The video concludes by warning that the US stock market may not respond well to the adoption of Yield Curve Control or to any other policy that would allow the Fed to meet its objectives while creating less new money than the markets currently anticipate.  Stocks tend to rise when the Fed creates a lot of money, whereas the stock market has frequently thrown a tantrum and sold off when the Fed threatens to create less new money.  Investors need to be aware of this risk.

For all the details, Macro Watch subscribers can log in and watch this video now.  It is 14-minutes long with 32 slides that can be downloaded. 

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