One cheer for yield curve control

Here’s Bloomberg:

Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero.

It’s a mistake for the Fed to try to reduce long-term interest rates. In the vast majority of cases, falling long-term interest rates are associated with slower expected NGDP growth. Lower interest rates are not, by themselves, expansionary.

So why do I give one cheer for yield curve control? Two reasons:

1. The policy might fail to reduce long-term rates.

2. The technique used by the Fed is likely to be expansionary. Thus the Fed will try to reduce long-term rates by purchasing assets with newly created money. The newly created money has an expansionary effect, and if the policy is successful it will raise long-term interest rates.



9 Responses to “One cheer for yield curve control”

  1. Gravatar of Benjamin Cole Benjamin Cole
    31. May 2020 at 16:05

    I think I agree with this post.

    However, a US pandemic economy may be sui generis, in terms of policy making. The world is defined by gluts of capital and very weak aggregate demand.

    In such circumstances, the sentiments of David Beckworth or Stanley Fischer, regarding helicopter drops, are worth pursuing.

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    31. May 2020 at 16:19

    It’s basically a price control on something whose price has no functional correlation with any positive outcomes they might be trying to achieve.

    The worst outcome would be if they were able to consistently hit their target rate.

  3. Gravatar of Garrett Garrett
    31. May 2020 at 18:01

    So if the 30y is at 1.41% right now, are they going to “target” 1.30% and then start buying bonds? What would their reaction be if their announcement led to the 30y rising to 1.50%? Would they be confused? Would they then sell instead of buy?

  4. Gravatar of Benjamin Cole Benjamin Cole
    31. May 2020 at 22:08

    Garret and all:

    The Bank of Japan targets 0.1% on 10-year JGBs. I wonder about this policy, as opposed to simple helicopter drops (on Main Street, not Wall Street).

    But the BoJ policy had not led to inflation, and Japan is currently in deflation (although the C19 situation makes everything different).

  5. Gravatar of Benjamin Cole Benjamin Cole
    31. May 2020 at 22:32

    Side note to anybody: Hitherto, I thought only credentialed macroeconomists could be diametrically opposed on key and fundamental issues, without the profession becoming a global laughing stock.

    But now we have epidemiologists!

    “Yale Epidemiologist: Hydroxychloroquine Should Be Used As Standard COVID-19 Treatment Despite Being Potentially Harmful”

    Carla Simmons Jun 01, 2020 12:33 AM EDT

    “Dr. Harvey Risch, an epidemiologist at Yale, disputes that hydroxychloroquine should be “widely available and promoted for prescription by physicians”. In an article published by Oxford University Press, aided by the Johns Hopkins Bloomberg School of Public Health, he explains why it is essential that scientists shouldn’t only “stand by” while knowing the drug’s efficacy and potential.

    In the article, Risch says that the combination of hydroxychloroquine and the antibiotic azithromycin has been widely distorted in both clinical and media reports. He also contends how five significant studies, counting two controlled trials, have shown considerable and meaningful outpatient treatment competence.”


    So, there you have it, chloroquine does not work and it works, and lockdowns work and they do not work.

    The real fun begins when macroeconomists and epidemiologists combine to work on papers….

  6. Gravatar of Julius Probst Julius Probst
    1. June 2020 at 04:20

    Good post. If they target yields, the quantity of base money will become endogenous. So you can have basically two outcomes:

    1)Either the long-run natural rate has declined to such an extent, that they do not need to buy a lot of bonds to achieve yield curve control – see Japan. This would actually be the bad outcome.

    2) They need to buy a lot of bonds in the short run to achieve YCC. This will be expansionary and ultimately they will have to abandon it because otherwise the monetary base increases even more significantly and long term rates rise as a result of the Fisher effect.

    Ironically, we therefore want them to do YCC and fail, outcome 2.

  7. Gravatar of rayward rayward
    1. June 2020 at 04:56

    I enjoy Sumner’s blog; I’m entertained by it. But sometimes I can’t resist. Sumner: “In the vast majority of cases, falling long-term interest rates are associated with slower expected NGDP growth. Lower interest rates are not, by themselves, expansionary.” Of course falling long-term rates are “associated with” slower expected NGDP growth: that’s why the rates are falling. Of course falling long-term rates are not “by themselves” expansionary: it takes supply and demand for expansion. What the pandemic has laid bare is the nonsense that often passes as economic insight.

  8. Gravatar of Justin Justin
    1. June 2020 at 05:29

    How can the Fed fail to reduce long term rates? They have to just keep buying until the yield is whatever they want it to be. Which probably won’t be a lot if the market knows the Fed is targeting a certain yield, as people will be happy to own the 10yr at 1.0% if the Fed’s target is 0.5%.

  9. Gravatar of ssumner ssumner
    1. June 2020 at 08:24

    Garrett, Good questions. BTW, I hope you bought TIPS when I did that TIPS post last month. 🙂

    Ben, Is it so hard to admit that you were wrong?

    Julius. Yup.

    Rayward, Plenty of people believe that reducing long term rates is expansionary.

    Justin, You said:

    “How can the Fed fail to reduce long term rates?”

    Easily. They have other objectives too. If it threatens hyperinflation then they will stop, and will have failed.

Leave a Reply