Adoption of yield-curve control could aid US recovery

Abstract

Subject Yield-curve control. Significance The US Federal Reserve (Fed) is contemplating yield-curve control (YCC), a policy pursued by the Bank of Japan (BoJ) and Reserve Bank of Australia (RBA) alongside quantitative easing (QE) and forward guidance. A central bank does this by capping the yields on government bonds of a chosen maturity through unlimited bond purchases. This supports the economy by reducing borrowing costs for financial institutions, households and businesses. Impacts By providing transparency over a central bank’s actions, YCC would be likely to reduce the volatility of long-term interest rates. YCC adds to the Fed balance sheet; the Fed will need a credible exit strategy to cut market volatility and the risk of Fed capital losses. A sharp uptick in inflation may put upward pressure on long-term yields, necessitating higher Fed purchases to maintain its targeted peg.