To stimulate the economy in the past decade with interest rates pinned near zero, the Federal Reserve made promises about how long they would remain low. Now, Fed officials are thinking hard about a new tool that would reinforce such promises by committing to buy Treasury securities in whatever amounts are needed to peg certain yields at low levels, according to the Wall Street Journal.
- Yield Caps: Fed officials believe forward guidance helps stimulate demand after their policy rate is near zero because it sets public expectations about future policy, which influences the rates set by markets. How they calibrate those two tools could determine whether and how they cap yields, which would function as a hybrid of both. The Fed hasn’t capped yields on Treasury securities since 1951, when it dismantled a stimulus scheme used during World War II, WSJ noted.
- For the U.S., caps might work like this: If the Fed concludes it is likely to hold rates near zero for at least three years, it could amplify this commitment by capping yields on every Treasury security that matures before June 2023. [WSJ]