Williams Says Fed Thinking ‘Hard’ About Yield-Curve Control
Williams Says Fed ‘Thinking Very Hard’ About Yield-Curve Control
(Bloomberg) -- Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero.
“Yield-curve control, which has now been used in a few other countries, is I think a tool that can complement -– potentially complement –- forward guidance and our other policy actions,” he said in an interview Wednesday on Bloomberg Television with Michael McKee and Jonathan Ferro. “So this is something that obviously we’re thinking very hard about. We’re analyzing not only what’s happened in other countries but also how that may work in the United States.”
Yield-curve control -- where the central bank caps yields on government bonds of a chosen maturity through potentially unlimited purchases -- has been used by Japan for years to stimulate economic activity and was recently adopted in Australia. Investors see the Fed embracing the tool in coming months as policy makers turn their attention toward fostering a strong rebound from the severe downturn caused by the coronavirus pandemic.
Speaking with reporters separately, Fed St. Louis President James Bullard said adopting yield curve control wasn’t urgent as investors are already expecting low rates for some time.
“This is certainly something the committee could consider, going forward,” he said. “I doubt that it would be real impactful at this stage because rates are low and expected to stay low.”
Covid-19 has inflicted a brutal toll on the U.S. economy. About 2.4 million Americans filed for unemployment insurance benefits in the week ended May 16, bringing the total to 38.6 million since mid-March when stay-at-home orders were imposed.
Williams also said the economic downturn may be near the bottom amid signs of an emerging recovery, and he expects a “pretty significant” rebound in the second half.
‘Near the Bottom’
“I think we are in a good place in terms of maybe we are near the bottom in terms of the economic downturn,” he said, though he cautioned that it was hard to be certain because of the difficulty in forecasting the economy amid such severe disruption to normal life.
While May or June might mark the low point, “even if we are starting to see perhaps a stabilization there in terms of the economy and maybe a little bit of a pickup, we’re still in a very difficult situation,” Williams said.
Bullard said he agreed with Williams that the economy was bottoming, and said the trough in activity might have been in April when the largest number of shutdown orders were in place. “It could well be we’ve seen the worst of this,” he said.
His Minneapolis Fed colleague Neel Kashkari separately stressed that there was still a lot of doubt around the outlook.
Virus Uncertainty
“Ultimately we have to solve the virus if we are going to solve the economy and there’s great uncertainty about where the virus is going right now,” Kashkari said in a CNN interview.
Fed officials have warned it will take time for the economy to recover to where it was before the virus struck and argued there is a need for more government spending to tide businesses and communities over until the economy is back on track. Williams repeated that fiscal policy had a role to play in reinforcing monetary policy support.
Lawmakers have passed $3 trillion of fiscal measures to cushion the blow from the virus and are debating another round of aid. The central bank has slashed interest rates to near zero, flooded financial markets with liquidity and unveiled a number of emergency lending programs to keep credit flowing.
Williams serves as vice chairman of the policy-setting Federal Open Market Committee and is the only regional Fed chief with a permanent vote, out of the 12 presidents.
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