Title: What is yield curve control?
Headings: What is yield curve control?
What is yield curve control?
Sage Belz
Former Research Analyst - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
David Wessel
Director - The Hutchins Center on Fiscal and Monetary Policy
Senior Fellow - Economic Studies
What is yield curve control, and why does it matter?
What do we learn from the Bank of Japan’s use of yield curve control?
How would YCC affect the economy?
What would an interest rate peg look like in the United States?
What are the downsides to YCC?

Content: Under QE, a central bank might announce that it plans to purchase, for instance, $1 trillion in Treasury securities. Because bond prices are inversely related to their yields, buying bonds and pushing up their price leads to lower longer-term rates. Under YCC, the central bank commits to buy whatever amount of bonds the market wants to supply at its target price. Once bond markets internalize the central bank’s commitment, the target price becomes the market price—who would be willing to sell the bond to a private investor for less than they could get by selling to the Fed? The Bank of Japan (BOJ) committed in 2016 to peg yields on 10-year Japanese Government Bonds (JGBs) around zero percent, in a fight to boost persistently low inflation. To hit that yield target, the BOJ has a standing offer to purchase any outstanding bond at a price consistent with the target yield. On days when private investors for any reason are less willing to pay that price, the BOJ ends up purchasing more bonds in order to keep yields inside the target price range. The Fed had some experience with interest rate pegs during and after World War II, when the Treasury needed help financing wartime expenditures. In 1942, the Fed and Treasury internally agreed that the Fed would cap the Treasury’s borrowing costs by buying any government bond that yielded above a certain level—at the time, about ½ percent on 3-month Treasury bills and 2½ percent on longer-term bonds. Until around 1947, the Fed was able to maintain these pegs without having to buy up large amounts of bonds.