Transcript:
Easan Arulanantham:
Could you explain yield curve control? I hear people talking about, I’m not sure what it is and how it affects everything.
Tom Vaughan:
Yeah, yield curve control is essentially a theory, as far as I’m concerned. So far, I haven’t seen it be or heard about it being used yet. But the idea is that the Federal Reserve, typically when they’re trying to stimulate the economy will reduce the lower end of the yield curve. So the very short term end of the yield curve. And, you know, they’re trying to lower that fed the target Fed funds rate. But what happens when that gets to zero. And so now, okay, it gets to zero. So then we do quantitative easing, we start to buy bonds, to try to increase liquidity, kind of a controversial concept, but both done in 2008 downturn and this 2020 downturn. So one of the thoughts is that maybe they should be trying to control the longer term aspect of the yield curve also, like the 10 year, and so they could be purchasing tenure treasuries instead of short term treasuries as a stimulus.
So you get to zero on the short end, then you start working on the 10 year, and I’ve heard that there are a fair number of different previous Federal Reserve governors who are looking at that favorably. Right now, that’s exactly not going to happen, because we’re actually trying to raise the 10 year yield, in order to slow things down. And that’s been pretty effective in the August of 2020. The tenure was at around point 6%. And now it’s around 3%. So that we’re we’re making that happen. But there’s not an interest in lowering the tenure yield at this point in time, just because that’s exactly the opposite what they’re trying to do, but yield curve control is about stimulating an economy, especially after you’ve already done the first part, which is lowering the short end to zero, you can go negative because that’s another thought. Right? That’s what they do. and Europe. But maybe instead of going negative, you work on the longer term end of the spectrum.
Easan Arulanantham:
And some people have theorized that this is just a cheaper way of doing quantitative easing. So controlling the long end of the yield curve, instead of you know, actually just adding so much money, more money to the money supply.
Tom Vaughan:
Yeah, we could end up in this situation, the Federal Reserve raises rates so much trying to fight inflation, they kick us into a pretty heavy recession. And then, you know, they have to go the other way and start lowering rates. There are, you know, some people out there that are advocating that this is what’s going to happen. You know, it’s hard to tell this far in advance, but, you know, and then we get into a situation where the rates get back down to zero again, and etc. So, you know, I would imagine during our lifetimes here, we can see some different things happening along those lines. And but yield curve control hasn’t actually been something they’ve done here in the US anyway, that I’ve seen, but it is something that they’re probably going to look at more seriously going forward. As you said, it might be better than quantitative easing.