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How Fed Could Goose Economy via Yield-Curve Control

Views of the Federal Reserve Ahead Of FOMC Rate Decision

Photographer: Andrew Harrer/Bloomberg

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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.