AdamA wrote: ↑Thu Apr 30, 2020 9:43 am
To be honest, the details of how this works are way over my head, and I could definitely be wrong.
The impression I get from having read about this from time to time on this forum is that the Fed has some ability to influence rates, but it cannot control them completely.
There are other deflationary forces like demographics (aging population) and unemployment that are potentially much more powerful than anything the Fed can do.
Again, just my gestalt - put out there more for discussion than as a strong opinion.
Yes, the changing environment forces the Fed to buy more or less depending on the financial climate.
It can work for a long time until it doesn't,
The Fed can control the rate they desire by buying up the surplus.
Right now they do not have to purchase many as long term rates are coming down.
Side Note: I have seen somewhere that they have not purchased any Junk Bonds yet.
Just saying they would buy them has influenced the market.
from the link below.
https://www.brookings.edu/blog/up-front ... e-control/
What is yield curve control, and why does it matter?
In normal times, the Fed steers the economy by raising or lowering very short-term interest rates, such as the rate that banks earn on their overnight deposits. Under yield curve control (YCC), the Fed would target some longer-term rate and stand ready to buy long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough. Current Fed Governors Richard Clarida and Lael Brainard have both said the Fed ought to consider adopting YCC, as have former Fed chairs Ben Bernanke and Janet Yellen.
Yield curve control is different in one major respect from QE, the trillions of dollars in bond-buying that the Fed pursued during the Great Recession. QE deals in quantities of bonds; YCC focuses on prices of bonds. Under QE, a central bank might announce that it plans to purchase, for instance, $1 trillion in Treasury securities. Because bond prices are inversely related to their yields, buying bonds and pushing up their price leads to lower longer-term rates.
Under YCC, the central bank commits to buy whatever amount of bonds the market wants to supply at its target price. Once bond markets internalize the central bank’s commitment, the target price becomes the market price—who would be willing to sell the bond to a private investor for less than they could get by selling to the Fed?
The Bank of Japan (BOJ) committed in 2016 to peg yields on 10-year Japanese Government Bonds (JGBs) around zero percent, in a fight to boost persistently low inflation. To hit that yield target, the BOJ has a standing offer to purchase any outstanding bond at a price consistent with the target yield. On days when private investors for any reason are less willing to pay that price, the BOJ ends up purchasing more bonds in order to keep yields inside the target price range.