By Howard Schneider
(Reuters) – The central banking strategy known as “yield curve control” has helped the Bank of Japan set long-term interest rates with less need to intervene in markets, though it has yet to prove itself in boosting inflation, two top New York Federal Reserve Bank officials wrote on Monday.
The comments by Matthew Higgins and Thomas Klitgaard, both vice presidents in the New York Fed’s Research and Statistics Group, are part of a debate within the Fed over whether yield curve control might help the U.S. central bank meet its full employment and 2% inflation goals.
Yield curve control is a complement to the strategy known as quantitative easing, in which a central bank buys long-term government bonds and other securities to keep longer-term interest rates low. Rather than announcing a set amount of monthly bond purchases, as the Fed did in fighting the 2007 to 2009 crisis, the central bank announces a target rate for longer-term bonds and buys what is necessary to enforce it.
“Does YCC help a central bank achieve its policy goals?” the two wrote. For Japan, which adopted YCC in 2016, “the jury is still out,” since low long-term interest rates have yet to push inflation to the bank’s 2% target.
“Still, YCC has had one clear benefit… The BOJ has been able to exert fairly close control… without resorting to large-scale interventions in the JGB (Japanese government bond) market. Investors accept that the Bank can buy whatever quantity of JGBs is needed to keep yields from rising and, as a result, it has not had to buy many at all,” they wrote.
While the BOJ still purchased around 20 trillion yen ($187 billion) of bonds over the past 12 months, that compares with as much as four times that amount annually before it began using yield curve control.
The study’s conclusion does point to a something-for-nothing benefit to YCC. As with other Fed programs announced in response to the coronavirus pandemic, knowledge that central bank support is available often means the bank has to do less in terms of actual lending or market intervention.
(Reporting by Howard Schneider; Editing by Dan Grebler)
