Yield Curve Control

In News

• Recently, the Bank of Japan has stuck to its policy of yield curve control which is triggering another decline in the country’s currency.

About Yield Curve Control

• Yield curve control is another way of interest-rate setting that involves buying as much U.S. Treasurys and government-backed debt as necessary to keep yields below a certain level.
• Under yield curve control: the Fed would set a specific long-term interest rate target and buy as many bonds as necessary to achieve it. 
  • YCC would set a specific price for the bonds in terms of their yield.
• It tracks yields on government bonds of varying durations, starting with the one-month Treasury and ending with the 30-year.
  • That curve is typically upward-sloping, meaning investors demand a higher interest rate in compensation for locking their money up for a longer period.

Impact

• Yield curve control would provide households and businesses with additional accommodation by keeping interest rates not typically set by the Fed low.
• It is more stimulative because it could potentially become an unlimited source of demand at certain levels of interest rates.
• It would also make government spending cheaper to finance and be a way for the Fed to put its low-rate promises into practice.
• Lower interest rates would weigh on savings yields and instead incentivize borrowing and spending because it reduces borrowing costs making it a more attractive time to buy assets like a home or a car. 

Source: BT