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Second Fed Governor Proposes Targeting the Short and Long End of the Yield Curve

Summary:
Two Fed governors now propose targeting the long end of the yield curve if there is another recession. Targeting yields on longer-term rates gets renewed attention from a second Fed governor. The proposed QE Replacement Mechanism was Last Used in WWII. Federal Reserve Governor Lael Brainard on Wednesday became the second U.S. central banker to talk about the possibility of targeting longer-term interest rates as a “new” tool to combat the next recession. Fed Vice Chairman Richard Clarida floated the idea in a speech earlier this year,and has done research on its use in Japan. “Once the short-term interest rates we traditionally target have hit zero, we might turn to targeting slightly longer-term interest rates—initially one-year interest rates, for example, and if more stimulus is

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Two Fed governors now propose targeting the long end of the yield curve if there is another recession.

Targeting yields on longer-term rates gets renewed attention from a second Fed governor. The proposed QE Replacement Mechanism was Last Used in WWII.

Federal Reserve Governor Lael Brainard on Wednesday became the second U.S. central banker to talk about the possibility of targeting longer-term interest rates as a “new” tool to combat the next recession.

Fed Vice Chairman Richard Clarida floated the idea in a speech earlier this year,and has done research on its use in Japan.

“Once the short-term interest rates we traditionally target have hit zero, we might turn to targeting slightly longer-term interest rates—initially one-year interest rates, for example, and if more stimulus is needed, perhaps moving out the curve to two-year rates,” Brainard said.

“Under this policy, the Fed would stand ready to use its balance sheet to hit the targeted interest rate, but unlike the asset purchases that were undertaken in the recent recession, there would be no specific commitments with regard to purchases of Treasury securities,” she added.

Won't Stop There

Rest assured the target will not stop at 1-year. Think 5-year, then 10-year.

Think Japan.

Brainard and Clarida are worried about the short end of the curve. Negative interest rates did not help the ECB nor Japan.

Then again, pinning the 10-year yield at 0% did not help Japan either.

Lessons Not Learned

  1. Don't meddle
  2. Don't blow bubbles

Central bank group think set in long ago. The only policy in place is "If it doesn't work, do more of it."

The result is easy to spot: bubbles and busts of increasing amplitude over time.

By the way, this talk is indicative of a Fed that is far more concerned about a recession than they want you to believe.

Mike "Mish" Shedlock

Mike Shedlock
Mike Shedlock (Mish) is a registered investment advisor representative for SitkaPacific Capital Management (http://www.sitkapacific.com/). Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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