Fed mulls promises for the future, appears to discount yield curve control

NEW YORK: The Federal Reserve edged towards a longer-range plan for monetary policy at its meeting last month, raising serious questions about a strategy known as yield curve control that is untested in the United States, and signaling it may rely on explicit promises about its inflation or employment goals to steer public expectations.

Minutes from the US central bank’s June 9-10 meeting indicate policymakers held a lengthy debate about the critical next steps they may take in setting monetary policy for what they hope will be a continued recovery from a pandemic-driven health and economic crisis.

At the centre of discussion: whether to import the sort of long-term interest rate targeting currently used by the Bank of Japan (BOJ) and the Reserve Bank of Australia (RBA), and what statements or “forward guidance” to make in the coming months about its plans for the recovery period.

While no decisions were made, policymakers appeared skeptical of yield curve control, alternately described as a “target” or “cap” in the Fed’s minutes, which were released on Wednesday.

“Nearly all participants indicated they had many questions regarding the costs and benefits of such an approach,” the minutes said. They then offered a long list of possible problems, from the Fed losing control of the size of its balance sheet to defend a rate target, to losing control of its independence if, for example, other monetary policy goals like controlling inflation clashed with the rate target.

Fed officials did appear to favour crafting some promises about the future – in effect making a pledge not to raise rates until some goal is met, with some of them favoring a focus on inflation and others on the unemployment rate.

That sort of language, many Fed officials felt, could stand on its own, “as long as the (policy-setting) committee’s forward guidance remained credible,” and would not need to be combined with yield curve control, as is currently done by the RBA.

In a recent Reuters poll, 29 of 44 economists said they did not think the Fed would introduce yield curve control this year. Goldman Sachs analysts gave slightly better than even odds the Fed might incorporate some element of yield curve control into its longer-range plans for managing the economic fallout from the novel coronavirus outbreak.

“The most likely next step is for the Fed to tie future rate hikes to achievement of its long-elusive 2% inflation goal,” JP Morgan analyst Michael Feroli said.

The behaviour of global bond markets isn’t forcing the Fed to rush. Interest rates across the spectrum are at record lows: Even if the US central bank decided to target some longterm rate, it likely wouldn’t set it at lower level than the rates already produced by a gloomy global economic outlook.

“The most likely next step is for the Fed to tie future rate hikes to achievement of its long-elusive 2% inflation goal.” Michael Feroli