U.S. Federal Reserve officials are still skeptical of adopting the yield curve control policy, arguing that it would likely provide “modest benefits” with “potential costs,” according to the minutes of the Fed’s latest policy meeting released Wednesday.
“Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment,” said the minutes of the central bank’s meeting held on July 28-29.
The Federal Open Market Committee (FOMC)’s forward guidance regarding the path of the federal funds rate “already appeared highly credible and longer-term interest rates were already low,” the minutes said.
Yield curve control, currently used by the Bank of Japan and the Reserve Bank of Australia, seeks to hold down longer-term interest rates by setting a target yield for one or more specific maturities of government debt.
The minutes also noted that many of these participants pointed to “potential costs” associated with yield caps and targets.
“Participants noted the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design and communication of the conditions under which such a policy would be terminated, especially in conjunction with forward guidance regarding the policy rate,” the minutes showed.
“In light of these concerns, many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly,” the minutes added.
At the latest policy meeting, the FOMC, the Fed’s policy-setting body, kept its benchmark interest rate unchanged at the record-low level of 0-0.25 percent while warning that a recent resurgence in COVID-19 cases nationwide is starting to weigh on economic recovery.
Participants continued to judge that it would be appropriate to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve FOMC’s maximum employment and price stability goals, according to the minutes.
“With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” the minutes said.
Concerning the possible form that revised policy communications might take, the participants commented on “outcome-based forward guidance” — under which the FOMC would undertake to maintain the current target range for the federal funds rate at least until one or more specified economic outcomes — such as inflation and unemployment rate — was achieved, the minutes said.