Federal Reserve is leaving door open to caps on Treasury yields

But central bank still rejects negative interest rates.

Federal Reserve Vice Chair Richard Clarida left open the possibility of employing caps on Treasury yields at some point in the future, though he indicated it’s not likely now and reiterated the central bank’s rejection of negative interest rates.

“Yield caps and targets were not warranted in the current environment but should remain an option that the committee could reassess in the future if circumstances changed markedly,” Clarida said Monday in an online event hosted by the Peterson Institute for International Economics.

Clarida also said policymakers might offer “refinements” to their Summary of Economic Projections — a quarterly document that outlines their economic outlook and projections for rates — in light of the framework changes announced last week by Fed Chair Jerome Powell.

Clarida’s remarks follow Powell’s announcement that the U.S. central bank will sometimes allow inflation to run above its 2% objective to make up for prior undershoots, and allow unemployment to run lower than officials had previously tolerated. The shift is aimed at boosting inflation after years of falling short of the Fed’s target, an outcome that hurts the central bank’s ability to fight recessions.

While not entirely ruling out yield caps, also known as yieldcurve control, Clarida repeated the Federal Open Market Committee’s conclusion that bond buying and communication on the future path of rates were the best tools to use once the federal funds rate had reached zero.

In a question-and-answer segment that followed, Clarida said the committee would likely return in September to a discussion of how it may alter its guidance on future monetary policy, but stopped short of revealing his preferences or predicting any outcomes.

“Now that we have concluded the review, I imagine we’ll be returning to a discussion of potentially refining guidance and our balance-sheet communication,” he said. “But I really wouldn’t want to prejudge where we are going to end up on that.”

SARAH SILBIGER / BLOOMBERG Federal Reserve Vice Chair Richard Clarida, during an online event by the Peterson Institute for International Economics, reiterated the central bank’s rejection of negative interest rates.