The Bond Market Is Betting on More Fed Action to Dodge a Depression
- Yield-curve control seen as tool to adopt in next crisis phase
- Fed would peg Treasury rates, likely on maturity of 2-3 years
A woman walks past the Marriner S. Eccles Federal Reserve building as it is reflected in a puddle of water in Washington, D.C.
Photographer: Andrew Harrer/Bloomberg
The Federal Reserve has already unleashed a barrage of new policies to keep the economy out of depression. Investors reckon it’s lining up another one.
The Fed’s version of the strategy known as yield-curve control is expected to involve capping yields on government bonds of a chosen maturity -– by buying however much it takes. For central banks that already cut short-term interest rates to zero, it’s a way to signal that they’ll stay low for an extended period, while helping pin down longer-term borrowing costs too.
Japan has been doing this for years, and Australia adopted the idea in March as the coronavirus struck. The Fed, which has responded to the pandemic by bulk-buying Treasuries and showering business and local government with credit, may not be ready to follow suit right now. U.S. states are tentatively emerging from lockdown, and policy makers will want to see how economic activity picks up.
But with unemployment at levels not seen since the 1930s, and Congress deadlocked over another round of fiscal stimulus, Fed officials have been publicly warning that more action will likely be needed. They’re taking another look at their own toolkits, in a policy review due to conclude this year. And the idea of tamping down Treasury yields keeps coming up.