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Markets closely monitored the yield curve inversion of the two-year and 10-year US Treasury notes in August 2019, an event that often warns of an upcoming recession. In case of a downturn, Federal Reserve officials would deploy their usual policy toolkit – lowering interest rates, issuing forward-looking guidance and unleashing a fresh round of quantitative easing. But Brookings Institution professionals Sage Belz and David Wessel explore an alternative option: yield curve control. Executives, regulators and investors will find this a valuable assessment of a potentially new Fed approach.

Summary

The Federal Reserve may institute a new policy option, yield curve control, to mitigate a future recession.

Federal Reserve officials control a robust portfolio of monetary policy levers, including quantitative easing (QE), the Fed funds rate and forward guidance. Now there’s potentially another mechanism at their disposal – yield curve control (YCC). 

YCC means setting a goal for a long-term rate and then buying government securities to achieve it.

During an economic slowdown, the Fed pushes down its benchmark short-term rate. But in the next recession, such a move may not offer the requisite stimulative effects. ...

About the Authors

David Wessel is a senior fellow at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy, where Sage Belz is a research analyst.


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