MBS Live Commentary: Fed Meeting Minute Bullet Points: What's Yield Curve Control?

By: Matthew Graham •

The minutes from the most recent Fed meeting were released today.  While there's not much left to be said when they've already been so clear about keeping rates low for a long time, we did get a few new thoughts about "yield curve control."  That would basically entail the Fed buying whatever it takes to keep longer term rates within a certain range compared to the short-term rates it already effectively controls through the Fed Funds Rate.

To be clear, the Fed doesn't control 2yr Treasury yields, but by keeping the Fed Funds Rate at zero, it greatly limits the extent to which 2yr yields can rise.  Case in point, after trading in the 1-2% range in the 2nd half of 2019, 2yr yields have been under 0.30% since the end of March, and generally trading a very flat range. 

10yr yields, on the other hand, have seen quite a bit more volatility during that time.  Yield curve control would help limit that volatility and it would help keep a lid on longer-term rates.  The goal would be to prevent deflation.  Indeed, in the laundry list of bullet points below, there are several references to the Fed's inflation thoughts, but also several references to the risks associated with yield curve control.  If there was a slight amount of weakness in the bond market after the Minutes were released, it could be due to the voicing of those concerns.  

Long story short, the jury is out on yield curve control and in any event, it isn't happening any time soon.  The jury is in on Treasury and MBS purchases.  They're good.  They'll continue.  Low policy rates will also continue for "years" unless something miraculously changes.  

Here's the laundry list of bullet points from Thomson Reuters (my own emphasis added):

  • FEDERAL RESERVE RELEASES MINUTES FROM JUNE 9-10 POLICY MEETING
  • MEMBERS AGREED FED WAS COMMITTED TO USING ITS FULL RANGE OF TOOLS TO SUPPORT THE U.S. ECONOMY
  • DISCUSSED WHETHER YIELD CURVE CAPS OR TARGETS COULD SUPPORT FORWARD GUIDANCE AND "COMPLEMENT" ASSET PURCHASES
  • PARTICIPANTS AGREED THAT THE DATA FOR THE SECOND QUARTER WOULD LIKELY SHOW THE LARGEST DECLINE IN ECONOMIC ACTIVITY IN POST–WORLD WAR II HISTORY
  • STAFF ECONOMIC SIMULATIONS SUGGESTED THAT FINANCIAL CONDITIONS WOULD NEED TO BE HIGHLY ACCOMMODATIVE "FOR MANY YEARS" TO MEANINGFULLY QUICKEN THE RECOVERY
  • MOST FED POLICYMAKERS THOUGHT FED SHOULD GIVE MORE EXPLICIT FORWARD GUIDANCE ON RATES, MORE CLARITY ON BOND-BUYING, ONCE ECONOMIC TRAJECTORY CLEARER
  • FED STAFF PRESENTATION SAID LIQUIDITY CONDITIONS CONTINUED TO IMPROVE IN GENERAL, BUT SOME STRESS WAS STILL EVIDENT IN SEVERAL FINANCIAL MARKETS
  • STAFF REVIEW OF YIELD CURVE TARGETS INCLUDED REVIEW OF U.S. EXPERIENCE IN WORLD WAR II, CURRENT POLICIES USED IN JAPAN AND AUSTRALIA
  • A NUMBER OF PARTICIPANTS JUDGED FORWARD GUIDANCE ON RATES AND BOND-BUYING SHOULD AIM TO SUPPORT RAPID ECONOMIC RECOVERY, FOSTER 'DURABLE' RETURN TO 2% INFLATION
  • PARTICIPANTS EXPECTED SOCIAL DISTANCING, SAVING AND LOWER LEVELS OF EMPLOYMENT AND INCOME TO RESTRAIN THE PACE OF EXPANSION OVER THE MEDIUM TERM
  • PARTICIPANTS AGREED THAT FORWARD GUIDANCE AND ASSET PURCHASES HAVE "IMPORTANT ROLES" IN MEETING EMPLOYMENT AND INFLATION GOALS
  • PARTICIPANTS "GENERALLY INDICATED" SUPPORT FOR FORWARD GUIDANCE BASED ON ECONOMIC OUTCOMES
  • A "NUMBER OF PARTICIPANTS" SPOKE IN FAVOR OF TYING FORWARD GUIDANCE TO INFLATION GOALS ALLOWING A "MODEST TEMPORARY" OVERSHOOT OF 2% TARGET
  • PARTICIPANTS STRESSED THAT HEALTH-CARE, FISCAL POLICY MEASURES, AND ACTIONS BY HOUSEHOLDS AND BUSINESSES, WOULD SHAPE RECOVERY'S PROSPECTS
  • A "COUPLE" FAVORED GUIDANCE BASED ON THE UNEMPLOYMENT RATE SINCE IT HAD BEEN KEPT LOW IN THE PAST AND COULD SIGNAL AN "EXTENDED PERIOD" OF SUPPORT FOR THE ECONOMY
  • PARTICIPANTS EXPECTED THAT A FULL RECOVERY IN EMPLOYMENT WOULD TAKE SOME TIME
  • A "FEW" PARTICIPANTS FAVORED FORWARD GUIDANCE BASED ON CALENDAR PROMISES, GIVEN UNCERTAINTY ABOUT HOW FAST THE ECONOMY MIGHT RECOVER
  • FED STAFF SAID A SECOND WAVE OF THE CORONAVIRUS OUTBREAK WAS NO LESS PLAUSIBLE THAN THEIR BASELINE FORECAST SCENARIO AND IF IT OCCURRED, ECONOMIC DISRUPTION WOULD BE MORE SEVERE AND PROTRACTED
  • A "COUPLE" OF PARTICIPANTS SAID PROMISES OF AN EXTENDED PERIOD OF LOW RATES COULD POSE RISKS TO FINANCIAL STABILITY
  • A FEW PARTICIPANTS NOTED THAT CURRENT LOW RATES OF INTEREST MIGHT LIMIT EFFECTIVENESS OF FURTHER ASSET PURCHASES BEYOND THOSE NEEDED FOR MARKET FUNCTION; A FEW WORRIED ABOUT IMPACT ON FINANCIAL STABILITY
  • IN DISCUSSION OF YIELD CURVE TARGETS, "NEARLY ALL PARTICIPANTS" HAD "MANY QUESTIONS" ABOUT THE COSTS AND BENEFITS OF SUCH AN APPROACH
  • VARIOUS PARTICIPANTS NOTED THE U.S. CENTRAL BANK SHOULD COMPLETE ITS POLICY FRAMEWORK REVIEW IN THE NEAR TERM
  • PARTICIPANTS "GENERALLY SAW" AUSTRALIA'S EXPERIENCE AS MOST RELEVANT TO THE U.S.
  • "MANY PARTICIPANTS" SAID THAT AS LONG AS THE FED'S FORWARD GUIDANCE "REMAINED CREDIBLE ON ITS OWN," IT WAS NOT CLEAR THAT A YIELD CURVE TARGET WOULD BE NEEDED TO REINFORCE IT
  • PARTICIPANTS RAISED "A NUMBER OF CONCERNS" OVER WHETHER THE FED COULD KEEP CONTROL OVER THE SIZE AND COMPOSITION OF ITS BALANCE SHEET WHILE ALSO SETTING A YIELD CURVE TARGET
  • OTHER CONCERNS INCLUDED DIFFICULT OF EXITING A YIELD CURVE TARGET, POSSIBLE RISKS TO CENTRAL BANK INDEPENDENCE, AND IMPACT ON PRIVATE MARKETS
  • "A COUPLE OF PARTICIPANTS" DEFENDED AN "APPROPRIATELY DESIGNED" YIELD CURVE TARGET AS A "POWERFUL COMMITMENT DEVICE"
  • ALL PARTICIPANTS AGREED TO CONTINUE STUDYING YIELD CURVE TARGET POLICIES
  • CONTINUING TO INCREASE HOLDINGS AT A MONTHLY PACE OF $80 BLN IN TREASURY SECURITIES AND $40 BLN IN AGENCY MBS WOULD HELP KEEP MARKET FUNCTIONING ROUGHLY IN LINE WITH MARKET EXPECTATIONS