Economics Weekly: Yield Curve Control – A Further Corruption of Capitalism?

Friday, April 24, 2020

I have been interested in exploring approaches that expand the space for targeting interest rates in a more continuous fashion as an extension of our conventional policy space and in a way that reinforces forward guidance on the policy rate. In particular, there may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum—yield curve caps [emphasis added]—in tandem with forward guidance that conditions liftoff from the ELB on employment and inflation outcomes. To be specific, once the policy rate declines to the ELB, this approach would smoothly move to capping interest rates on the short-to-medium segment of the yield curve. The yield curve ceilings would transmit additional accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases.

—Fed Governor Lael Brainard, November 2019

The probability of a second wave of the current coronavirus pandemic taking place in the coming autumn is certainly a risk that the general public, investors, and policymakers should be preparing for. A number of Asian countries have already experienced such mini-waves, and history shows that in the past—e.g., the flu pandemic of 1918—the second wave can turn out to be far deadlier than the first. Today, the likelihood of avoiding a second wave seems low, given the estimated low percentage of the population that has had the virus and the lack of a vaccine or usable antibody testing—it seems to be more a question of its severity. A major recurrence would pose an even greater challenge for the already struggling economies and for the policymakers with regard to how to address it.

In this Economics Weekly, we discuss a further measure that monetary policymakers are already discussing, whether or not there is a second wave—the capping of interest rates.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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