Yield-Curve Control Could Complicate Fed’s Exit Strategy

Federal Reserve Chair Jerome Powell has said that he and his colleagues are “not even thinking about thinking about raising rates.” That doesn’t mean we can’t still speculate about what the central bank’s exit from ultra-accommodative policy will look like, however many years into the future that may be.

Effectively, by announcing a monthly floor on purchases of U.S. Treasuries and agency mortgage-backed securities last week, the Fed started what will surely be a long countdown to a second “taper tantrum.” The original episode happened in 2013, when yields lurched higher after Ben S. Bernanke surprised investors by suggesting that the central bank would soon scale back its bond-buying program. In general, the Fed has indicated that interest rates are its primary tool and asset purchases are a more “extraordinary” measure, even if they seem commonplace by now. That means before Powell would think about increasing rates, he’d look to steady the balance sheet.