(Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard said a strategy of capping Treasury yields out to a certain maturity may not work and such yield-curve control seems unnecessary with the market pricing in rates near zero out into the future.
“Right now there are more questions than answers about this, and I don’t really think this is a pending thing for the committee because we are already expecting rates to be low for quite awhile,” Bullard said Tuesday.
“I am not sure you need to put caps in or anything else. You have already got the low expected rates that you desire for this situation,” he said during an interview on Bloomberg Television with Lisa Abramowicz, Tom Keene and Jonathan Ferro.
Bullard’s comments echoed Fed Chair Jerome Powell, who told Congress last week that the Federal Open Market Committee’s study of yield curve control was at an early phase and no decisions had been taken. Fed officials this month held interest rates near zero and signaled they would keep them there through 2022 as they confront the economic impact from the coronavirus.
“The U.S. had yield curve control during World War II, and after the war the exit from yield curve control was very difficult, so it kind of ended in tears,” Bullard said. “That is one of the main concerns about going in this direction.”
YCC vs QE
“Japan as we know has done yield-curve control, but one of the things they wanted to do was get out of the quantitative easing program,” he said. “They scaled that back dramatically by just targeting yields directly. So I think there are a lot more questions than answers around yield-curve control right now.”
Bullard indicated he was comfortable with the committee’s current guidance in its statement. He said that while the U.S. economy is likely to rebound in the third quarter, businesses need to adapt to living with a continuing threat of the virus rather than hope for a quick solution from a vaccine.
In a video discussion later Tuesday hosted by the Milken Institute, Bullard said that the effects of the virus have turned out so far to be less severe in the U.S. than initially feared.
“Actual output looks like it will be 90% of what we would have produced in kind of a normal quarter,” Bullard said, calling that “pretty amazing” in light of shutdowns to slow virus spread. “I think the work from home is very powerful. It is a blessing we have mobile technology and are able to use it.”
While Bullard said he was hopeful that the U.S. economy would continue to bounce back, he added that he was still concerned by the possibility of persistently high unemployment and mass failures of businesses.
“I think we are at risk of depression,” Bullard said, though that is not his base-case forecast. “If you get into the depression scenario, the health outcomes and the economic outcomes will be worse — so that’s really why we should all be motivated to think about how we can stay out of that situation.”
U.S. unemployment fell to 13.3% in May after the lockdowns sent the level surging to 14.7% in April. According to quarterly forecasts published June 10, the median estimate of Fed officials was for unemployment to continue declining to 9.3% in the fourth quarter.
(Updates with later Bullard comments during Milken Institute webinar from ninth paragraph.)
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