Tuesday , July 14 2020
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One cheer for yield curve control

Summary:
Here’s Bloomberg: Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero. It’s a mistake for the Fed to try to reduce long-term interest rates. In the vast majority of cases, falling long-term interest rates are associated with slower expected NGDP growth. Lower interest rates are not, by themselves, expansionary. So why do I give one cheer for yield curve control? Two reasons: 1. The policy might fail to reduce long-term rates. 2. The technique used by the Fed is likely to be expansionary. Thus the Fed will try to reduce long-term rates

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Here’s Bloomberg:

Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero.

It’s a mistake for the Fed to try to reduce long-term interest rates. In the vast majority of cases, falling long-term interest rates are associated with slower expected NGDP growth. Lower interest rates are not, by themselves, expansionary.

So why do I give one cheer for yield curve control? Two reasons:

1. The policy might fail to reduce long-term rates.

2. The technique used by the Fed is likely to be expansionary. Thus the Fed will try to reduce long-term rates by purchasing assets with newly created money. The newly created money has an expansionary effect, and if the policy is successful it will raise long-term interest rates.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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