It’s been obvious for a while that the next phase of global monetary madness would be both spectacular and very different from the previous phase. The question was whether the difference would be in degree or kind.
Now the answer is looking like “both.”
Let’s start with “yield curve control,” in which central banks, instead of just pushing down interest rates, intervene to maintain the relationship between short and long-term rates.
In a recent interview, Federal Reserve Governor Lael Brainard said the following:
“I have been interested in exploring approaches that expand the space for targeting interest rates in a more continuous fashion as an extension of our conventional policy space and in a way that reinforces forward guidance on the policy rate. In particular, there may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum — yield curve caps — in tandem with forward guidance that conditions liftoff from the [effective lower bound] on employment and inflation outcomes.
To be specific, once the policy rate declines to the ELB, this approach would smoothly move to capping interest rates on the short-to-medium segment of the yield curve. The yield curve ceilings would transmit additional accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases.”
She sounds a bit like Alan Greenspan back in his peak obscurity days, so here’s a quick translation:
In the next recession, the Fed will promise to keep short rates at or below zero for a long time and also promise to hold longer-term rates a pre-set distance from short rates, thus freezing the slope of the yield curve in place.
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