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

-edited

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

Comments (27)
No. 1-14
Greggg
Greggg

We were warned years ago. Now the strategies are getting broken down to tactical plans. Fish heads and rice, here we come.

ksdude
ksdude

All this talk and action trying to avoid a recession maybe things are worse than what they tell anyone. Haha. They seem to think they can avoid it forever. It will never be called a resession, or what it really is.

Maximus_Minimus
Maximus_Minimus

What's this persistent FED chatter? It's not like we're in some existential bubble noone could possibly foresee?

CzarChasm-Reigns
CzarChasm-Reigns

Talk is cheap... Fedspeak... even more so.

Sechel
Sechel

we're supposed to be a free market economy yet nobody believes the market should determine the cost of money. whether you believe that we need a fed or not(i believe some functions are legit such as lender of last resort and maintaining stable prices) one thing is clear, this function as promoting growth is not appropriate or necessary. these aren't even elected leaders, more descriptively a bunch of over-confident academics

thimk
thimk

another fed tweek tool , who would have thought ,

Runner Dan
Runner Dan

Lael Brainard doesn’t appear to have any children who would get to live with the consequences of her desired policies. Same with the SF Fed Pres Mary Daly. Kind of reminds me of all the childless female European leaders: May, Merkel, and Macron.

CautiousObserver
CautiousObserver

Attention Fed governors:

At some point the piper must be paid for all the zombie debt in the world you helped create. If you emit an even bigger tidal wave of new credit to forestall that day, you are only ensuring that profligate spending by the US Congress will explode exponentially and every single ordinary soul who trusted you will be made to pay for your mistake before it is all over.

If that's the plan, you might as well decree tomorrow that the Fed owns everything, US Government is a tax collector and military contractor for the banks, and anyone who lives in the US has to send them a big monthly check out of their savings or end up homeless.

Sechel
Sechel

so much for the 2 or 10 year being a measure of inflation or inflation expectations. so much or the riskless lending rate being a useful financial planning tool

Bam_Man
Bam_Man

Then it's "Bye-Bye Bond Market". Next "(il)logical" step is naturally MMT. We will get there. The only question is how soon.

ccichocki
ccichocki

I'm no expert, but don't banks rely on the 3 month 10 year spread? What would lowering the 1 or 2 year do other than move more money into risk assets? Appreciate your comments.

FromBrussels
FromBrussels

.....Looks like that at one point in the near future borrowers will actually get paid interest on their loans!.....This is a great world we re living in mr Jack and it s getting greater by the day !

RonJ
RonJ

"Lessons Not Learned

Don't meddle
Don't blow bubbles"

The lessons are well known. Congress very well knew why Glass-Steagall existed and dismantled it anyway. Who did it benefit to dismantle Glass-Steagall?

The SEC knew full well why leverage above 12 to 1 was dangerous, yet they gave leverage waivers to the BIG Five investment banks. Who did it benefit to give leverage waivers?

Who does it benefit, to target long and short rates in the next recession?

Back when Volker raised rates to 20%, a group of congressmen representing farm states, who were hurting, met with him. Volker told them the hurting farmers were not his constituents.

Remember, not one banker was criminally prosecuted for financial crimes they committed during the housing bubble. Who did that benefit?

Webej
Webej

The Fed is omnipotent. If it doesn't rain, the Fed can still make the streets wet.