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FED Yield Curve Control

Posted: Fri Jun 12, 2020 6:59 pm
by snedgar
I read today that the FOMC is considering implementing front-end yield curve control (YCC) to force/maintain low rates on bonds of longer maturities.

https://www.brookings.edu/blog/up-front ... e-control/

I can't fathom that this would be without unintended consequences. Am I missing something?

Re: FED Yield Curve Control

Posted: Fri Jun 12, 2020 7:58 pm
by pmward
snedgar wrote:
Fri Jun 12, 2020 6:59 pm
I read today that the FOMC is considering implementing front-end yield curve control (YCC) to force/maintain low rates on bonds of longer maturities.

https://www.brookings.edu/blog/up-front ... e-control/

I can't fathom that this would be without unintended consequences. Am I missing something?
They did the same thing in the WWII era by capping rates on all bonds. This is nothing new, even for us, it's just a new fancy name. With the amount of debt we have the Fed has no choice but to put a ceiling on rates. At the moment, rates are staying down on their own so they have no need of yield curve control. If rates start to go up though, to the point that it becomes problematic, they will have no choice.

Re: FED Yield Curve Control

Posted: Mon Jun 29, 2020 5:37 pm
by volcker
pmward wrote:
Fri Jun 12, 2020 7:58 pm
They did the same thing in the WWII era by capping rates on all bonds. This is nothing new, even for us, it's just a new fancy name. With the amount of debt we have the Fed has no choice but to put a ceiling on rates. At the moment, rates are staying down on their own so they have no need of yield curve control. If rates start to go up though, to the point that it becomes problematic, they will have no choice.
Things were pretty different in the 1940s. The US had a lot of gold to back the dollar, debt/GDP was lower than today, entitlements were not a problem, and the US was the only world super power to emerge from the war with an intact industrial base. Now the amount of gold is not enough to back the dollar at current prices, debt/GDP is very high and aiming for the moon, unfunded liabilities as so huge that the US is effectively bankrupt (no way the debt could ever be paid back in real goods and services) but countries have chosen to pretend that they aren't, and the dollar is fiat, meaning it's a game of confidence. If confidence is ever lost, then it could be game over.
YCC is a commitment to rip off those who are still willing to purchase treasuries, by printing money in unlimited quantities to keep rates unnaturally (and unfairly) low. It risks destroying the confidence on which the scheme depends. But they've been taking these kinds of risks for quite some time and the game is still running, so it can certainly continue to work for a very long while.

Re: FED Yield Curve Control

Posted: Mon Jun 29, 2020 5:45 pm
by pmward
volcker wrote:
Mon Jun 29, 2020 5:37 pm
pmward wrote:
Fri Jun 12, 2020 7:58 pm
They did the same thing in the WWII era by capping rates on all bonds. This is nothing new, even for us, it's just a new fancy name. With the amount of debt we have the Fed has no choice but to put a ceiling on rates. At the moment, rates are staying down on their own so they have no need of yield curve control. If rates start to go up though, to the point that it becomes problematic, they will have no choice.
Things were pretty different in the 1940s. The US had a lot of gold to back the dollar, debt/GDP was lower than today, entitlements were not a problem, and the US was the only world super power to emerge from the war with an intact industrial base. Now the amount of gold is not enough to back the dollar at current prices, debt/GDP is very high and aiming for the moon, unfunded liabilities as so huge that the US is effectively bankrupt (no way the debt could ever be paid back in real goods and services) but countries have chosen to pretend that they aren't, and the dollar is fiat, meaning it's a game of confidence. If confidence is ever lost, then it could be game over.
YCC is a commitment to rip off those who are still willing to purchase treasuries, by printing money in unlimited quantities to keep rates unnaturally (and unfairly) low. It risks destroying the confidence on which the scheme depends. But they've been taking these kinds of risks for quite some time and the game is still running, so it can certainly continue to work for a very long while.
Nice username :)

Re: FED Yield Curve Control

Posted: Tue Jun 30, 2020 11:47 am
by volcker
pmward wrote:
Mon Jun 29, 2020 5:45 pm
Nice username :)
I'm a fan of the late great chairman.

Re: FED Yield Curve Control

Posted: Tue Jun 30, 2020 12:07 pm
by pmward
volcker wrote:
Tue Jun 30, 2020 11:47 am
pmward wrote:
Mon Jun 29, 2020 5:45 pm
Nice username :)
I'm a fan of the late great chairman.
Part of me kind of wants to create an alter-ego user called "Bernanke" and then Volcker and Bernanke can have an epic thread duking it out ;)

Re: FED Yield Curve Control

Posted: Tue Jun 30, 2020 12:20 pm
by volcker
pmward wrote:
Tue Jun 30, 2020 12:07 pm
Part of me kind of wants to create an alter-ego user called "Bernanke" and then Volcker and Bernanke can have an epic thread duking it out ;)
Would Paul even talk to Ben? ;D

Re: FED Yield Curve Control

Posted: Tue Jun 30, 2020 2:22 pm
by jhogue
Paul talked with Ben all the time.

Ben was the chair of the economics department of Princeton University. Paul held an endowed chair in economics at the same time.