The Idea That Fed Will Use Yield Caps Is Dead, for Now
It’s not a complete surprise, but the minutes showed the Fed’s members are fairly skeptical about the benefit-cost trade off of adopting a yield-targeting strategy. At the margin, it gives a higher degree of freedom for the yield curve to move around.
The Fed minutes showed most members judged that yield caps “would likely provide only modest benefits in the current environment” which seems redundant when the Fed’s forward guidance has already pinned rates to the floor. The potential costs include a rapid expansion of the balance sheet and the difficulty in communicating an exit strategy.
It’s not a complete surprise, but the minutes showed the Fed’s members are fairly skeptical about the benefit-cost trade off of adopting a yield-targeting strategy. At the margin, it gives a higher degree of freedom for the yield curve to move around.
The Fed minutes showed most members judged that yield caps “would likely provide only modest benefits in the current environment” which seems redundant when the Fed’s forward guidance has already pinned rates to the floor. The potential costs include a rapid expansion of the balance sheet and the difficulty in communicating an exit strategy.