WASHINGTON–The Federal Reserve not likely to cap short-term Treasury yields as part of its initial package of economic stimulus measures, but will most likely reserve the option to do so later, according to a new report.
The Wall Street Journal reported Fed officials were briefed at their June rate-setting meeting on the use of yield caps in Japan and Australia, and on the central bank’s experience with yield caps between 1942 and 1951.
The Journal further reported officials haven’t reached a consensus about when or whether to cap yields on short-term Treasuries, although some board members have indicated approval for the strategy as a meaningful way to reinforce their so-called forward guidance about how long they plan to keep rates near zero and purchase Treasury securities to stimulate the economy.
As the report explained, yield caps would reinforce low-rate pledges by committing to buy Treasury securities in whatever amounts are needed to peg certain yields at low levels. “For example, if the Fed concluded that the economy would need rates near zero for at least three years before meeting its goals to keep inflation around 2% and to return unemployment to its prepandemic lows, it could strengthen this commitment by capping yields on every Treasury security that matures before June 2023,” the Journal said.
Attention from Wall Street
The Journal further reported the prospect the central bank will cap yields on two- or three-year Treasury securities has received heavy attention from investors and Wall Street analysts in recent weeks, with several banks expecting some type of yield-cap strategy as soon as September.
“Several central bank officials have indicated a strong preference toward first ironing out their forward guidance and asset-purchase plans,” the Journal reported. “The Fed is much more familiar with those tools, and many officials haven’t spent as much time getting comfortable with how they would use yield caps, sometimes called yield curve control.”