Central banks set short-term rates and markets set the rest, right? That’s just the way thing work -- except in dire need, like when facing a pandemic’s massive economic disruption. The U.S. Federal Reserve is just the latest central bank to give serious consideration to a policy called yield-curve control that seeks to hold down longer-term interest rates by capping what the government pays on its debt.
The yield curve (YCC) is the relationship between rates on bonds of varying durations. Investors generally demand a higher yield for holding longer-term debt, meaning that the curve is normally upward sloping. And normally, central banks manage monetary policy through short-term rates only: The Fed, for instance, creates incentives to keep overnight borrowing within a range it specifies -- what’s known as the Fed Funds rate. In a policy of yield-curve control, the central bank also sets a target yield for one or more specific maturities of government debt.