<p>History and Theories of Yield Curve Control (20 pages)</p>
<p><a href="https://www.boj.or.jp/en/announcements/press/koen_2017/data/ko170111a1.pdf" rel="nofollow noreferrer">https://www.boj.or.jp/en/announcements/press/koen_2017/data/ko170111a1.pdf</a></p>
<blockquote>
<p>Lastly,  as  the  fourth  issue, I  would  like  to  touch  upon  the  relation  between  fiscal  management  and  yield  curve  control.  As  I  noted,  yield  curve  control  by  the  Bank  differs  from  the  government  bond  price-supporting  policies  once  implemented  in  the  United  Kingdom and the United States. While these policies aimed to minimize financial costs of the government, the Bank's current policy aims to overcome deflation and achieve the price stability  target.  Given  that  the  policy  directly  sets  the  long-term  interest  rates  as  its  operational   target,   however,   it   is   undeniable   that   the   area   deeply   related   to   fiscal   management expands. Not surprisingly, therefore, there are voices of concern and criticism that  the  current  policy  coincides  with  money  finance  or  monetization,  or  that  the  exit strategy of  the  policy  will  be  constrained  by  consideration  for  fiscal  management.  It  is  therefore   important   that   the   Bank,   bearing   in   mind   those   voices   as   well,   gain   the   understanding  of  the  markets  and  the  public  by  releasing  more  carefully  than  ever  the  information on the purpose and ways of thinking about monetary policy implementation.</p>
</blockquote>
<p>Quantitative Easing: Entrance and Exit Strategies (16 pages)</p>
<p><a href="https://files.stlouisfed.org/files/htdocs/publications/review/10/11/Blinder.pdf" rel="nofollow noreferrer">https://files.stlouisfed.org/files/htdocs/publications/review/10/11/Blinder.pdf</a></p>
<blockquote>
<p>Because many of the Fed’s unorthodox quantitative easing policies put taxpayer money at risk, these policies constituted quasi-fiscal operations — equivalent to investing government funds in risky assets.</p>
</blockquote>
<p>I would argue that there was less spare capacity in the economies after World War 2 due to destruction of assets in many countries and due to wartime restrictions of consumption and investment. Also the household sector in the United States emerged with a relatively clean balance sheet where collateral assets were not saturated with private debt. By contrast the economies with QE today have spare production capacity and assets saturated with greater burden of private debt. I am not aware of any econometric series that compares the private debt to government debt. Rebel economist Steve Keen publishes some charts making these comparisons of private to public debt but I have not drilled down into his sources of data.</p>

CC BY-SA 4.0
2021-03-01T20:33:33.253Z
How does this answer the OP question: **"Is there anything the Fed learned from the previous episode so that the program can be exited without a massive move in inflation?"**
1muflon1
CC BY-SA 4.0
2021-03-01T21:27:24.703Z
The prelude to the question describes Yield Curve Control during World War 2, the 17% inflation rate during 1947, and the concept "fiscal dominance". Whether or not the Fed has learned lessons from this historic period the references above show that the analysis of the fiscal policy, monetary policy, and question of central bank independence versus fiscal dominance are much more complex than what is described in the prelude to the question. Since World War 2 central banks have initiated Yield Curve Control w/o fiscal dominance. Fed has no mind to read so I agree an answer would be conjecture.
SystemTheory
CC BY-SA 4.0
2021-03-01T21:38:39.223Z
That is fine but if you are writing an answer to a question you should also consider actually providing answer the question, not just make a comment which corrects part of question (which can be part of the answer but is not answer itself), otherwise you are just commenting not answering the question, see our [help page on answering questions](https://economics.stackexchange.com/help/how-to-answer)
1muflon1
CC BY-SA 4.0
2021-03-01T21:57:18.483Z
Fed has obviously learned that it can use unconventional monetary policy during the global financial crisis and the more recent pandemic crisis and the Bank of Japan has shown that it could reduce its balance sheet fairly rapidly. But those "lessons learned" are only implied in the facts. Fiscal dominance is not the cause of either Quantitative Easing or Yield Curve Controls when it is evident that such policies are initiated by the central bank making independent monetary policy decisions. The literature suggests monetary policy independence is an ideal that only sometimes manifests.
SystemTheory
CC BY-SA 4.0
2022-10-27T10:21:00.653Z
Given what has happened in the last 18 months, the question appears prescient.  The Fed is being criticized for continuing QE for too long during a period of post Covid fiscal expansion which also coincided with supply chain disruption.  It is also being accused of raising rates too slowly.  And, we have almost double digit inflation in the US.  Although it is not quite the same as post-war conditions, it certainly “rhymes”.
dm63
CC BY-SA 4.0
2021-03-01T20:07:27.157Z
2021-03-01T20:07:27.157Z
SystemTheory
<p>Over the past year, the notion yield curve control has resurfaced and appeared on FOMC minutes, decades after its last implementation.</p>
<p>According to <a href="https://www.stlouisfed.org/on-the-economy/2020/august/what-yield-curve-control" rel="nofollow noreferrer">the Fed's introduction page</a>:</p>
<blockquote>
<p>As the U.S. continued to incur debt, the Fed was obligated to keep
buying securities to maintain the targeted rates—forfeiting some
control of its balance sheet and the money stock. The public generally
preferred to hold higher-yielding, longer-term bonds. Consequently,
the Fed purchased a large amount of short-term bills, which also
increased the money supply, to maintain the low interest rate peg.</p>
<p>After the war ended, FOMC members grew more concerned with addressing
the rapid inflation that materialized. However, President Harry S.
Truman and his treasury secretary still favored a policy that
maintained YCC (which also protected the value of wartime bonds by
implying a price floor). By 1947, inflation was over 17%, as measured
by the year-over-year percent change in the consumer price index
(CPI), so the Fed ended the peg on short-term rates in an attempt to
combat developing inflationary pressures.)</p>
</blockquote>
<p>This poses an interesting dilemma in configuring the bounds of the program. WW2 was a one-sided victory with rather clear end date. Yet the fact that YCC continued post-WW2 suggests that terminating the program was difficult. It's conceivable that marshaling the political will to end a program that the treasury likely derives massive utility for operating against a high fiscal-deficit backdrop was a major challenge. This phenomenon is sometimes termed &quot;fiscal dominance.&quot;</p>
<p>A <a href="https://www.bis.org/publ/bppdf/bispap65.pdf" rel="nofollow noreferrer">BIS paper</a> goes into great length on the matter. Condensing one of the themes:</p>
<blockquote>
<p>For many, a long period of large fiscal deficits and very high public
debt-to-GDP ratios raises the spectre of fiscal dominance. It will in
any case accentuate the links between fiscal policy, monetary policy
and government debt management.</p>
</blockquote>
<h2>Question</h2>
How can the Fed enforce exit criteria without a massive/dramatic macro impairment (such as double-digit inflation)?

CC BY-SA 4.0
2021-03-01T10:28:02.770Z
what are your criteria for 'fed learning anything'? Only people can learn so Fed can't learn anything. It is very difficult to check whether Jerome Powell ever studied literature on this issue. Perhaps, you could try to rephrase it in a way whether there is some literature on what could be done to avoid inflation in such case?
1muflon1
CC BY-SA 4.0
2021-03-01T12:40:01.713Z
If you do a search in Google Scholar for “treasury fed accord”, you see articles, some written by the Fed researchers. So they have studied the episode.
Brian Romanchuk
CC BY-SA 4.0
2021-03-30T07:40:14.090Z
@1muflon1 Tried to reword question for clarity.
Arash Howaida
CC BY-SA 4.0
2021-03-30T14:05:34.113Z
Your question, the last sentence, is confusing. Ending YCC would probably be associated with less inflation and the impairment is to the budget.
H2ONaCl
<macroeconomics><monetary-policy><federal-reserve><yield-curve>
How can the Fed enforce exit criteria if they begin yield curve control?
Arash Howaida
# How can the Fed enforce exit criteria if they begin yield curve control?

(Asked by: username_0 on 2021-03-01)

Over the past year, the notion yield curve control has resurfaced and appeared on FOMC minutes, decades after its last implementation.

According to [the Fed's introduction page](https://www.stlouisfed.org/on-the-economy/2020/august/what-yield-curve-control):

> As the U.S. continued to incur debt, the Fed was obligated to keep
> buying securities to maintain the targeted rates—forfeiting some
> control of its balance sheet and the money stock. The public generally
> preferred to hold higher-yielding, longer-term bonds. Consequently,
> the Fed purchased a large amount of short-term bills, which also
> increased the money supply, to maintain the low interest rate peg.
>
> After the war ended, FOMC members grew more concerned with addressing
> the rapid inflation that materialized. However, President Harry S.
> Truman and his treasury secretary still favored a policy that
> maintained YCC (which also protected the value of wartime bonds by
> implying a price floor). By 1947, inflation was over 17%, as measured
> by the year-over-year percent change in the consumer price index
> (CPI), so the Fed ended the peg on short-term rates in an attempt to
> combat developing inflationary pressures.)

This poses an interesting dilemma in configuring the bounds of the program. WW2 was a one-sided victory with rather clear end date. Yet the fact that YCC continued post-WW2 suggests that terminating the program was difficult. It's conceivable that marshaling the political will to end a program that the treasury likely derives massive utility for operating against a high fiscal-deficit backdrop was a major challenge. This phenomenon is sometimes termed "fiscal dominance."

A [BIS paper](https://www.bis.org/publ/bppdf/bispap65.pdf) goes into great length on the matter. Condensing one of the themes:

> For many, a long period of large fiscal deficits and very high public
> debt-to-GDP ratios raises the spectre of fiscal dominance. It will in
> any case accentuate the links between fiscal policy, monetary policy
> and government debt management.

## Question

How can the Fed enforce exit criteria without a massive/dramatic macro impairment (such as double-digit inflation)?

**Tags:** macroeconomics, monetary-policy, federal-reserve, yield-curve
> **Comments:**
> **username_1**: what are your criteria for 'fed learning anything'? Only people can learn so Fed can't learn anything. It is very difficult to check whether Jerome Powell ever studied literature on this issue. Perhaps, you could try to rephrase it in a way whether there is some literature on what could be done to avoid inflation in such case?  
> **username_2**: If you do a search in Google Scholar for “treasury fed accord”, you see articles, some written by the Fed researchers. So they have studied the episode.  
> **username_0**: @1muflon1 Tried to reword question for clarity.  
> **username_3**: Your question, the last sentence, is confusing. Ending YCC would probably be associated with less inflation and the impairment is to the budget.  

---

## 1 answers

### Answer by username_4 on 2021-03-01. Score: 0

History and Theories of Yield Curve Control (20 pages)

<https://www.boj.or.jp/en/announcements/press/koen_2017/data/ko170111a1.pdf>

> Lastly, as the fourth issue, I would like to touch upon the relation between fiscal management and yield curve control. As I noted, yield curve control by the Bank differs from the government bond price-supporting policies once implemented in the United Kingdom and the United States. While these policies aimed to minimize financial costs of the government, the Bank's current policy aims to overcome deflation and achieve the price stability target. Given that the policy directly sets the long-term interest rates as its operational target, however, it is undeniable that the area deeply related to fiscal management expands. Not surprisingly, therefore, there are voices of concern and criticism that the current policy coincides with money finance or monetization, or that the exit strategy of the policy will be constrained by consideration for fiscal management. It is therefore important that the Bank, bearing in mind those voices as well, gain the understanding of the markets and the public by releasing more carefully than ever the information on the purpose and ways of thinking about monetary policy implementation.

Quantitative Easing: Entrance and Exit Strategies (16 pages)

<https://files.stlouisfed.org/files/htdocs/publications/review/10/11/Blinder.pdf>

> Because many of the Fed’s unorthodox quantitative easing policies put taxpayer money at risk, these policies constituted quasi-fiscal operations — equivalent to investing government funds in risky assets.

I would argue that there was less spare capacity in the economies after World War 2 due to destruction of assets in many countries and due to wartime restrictions of consumption and investment. Also the household sector in the United States emerged with a relatively clean balance sheet where collateral assets were not saturated with private debt. By contrast the economies with QE today have spare production capacity and assets saturated with greater burden of private debt. I am not aware of any econometric series that compares the private debt to government debt. Rebel economist Steve Keen publishes some charts making these comparisons of private to public debt but I have not drilled down into his sources of data.

> **Comments:**
> **username_1**: How does this answer the OP question: **"Is there anything the Fed learned from the previous episode so that the program can be exited without a massive move in inflation?"**  
> **username_4**: The prelude to the question describes Yield Curve Control during World War 2, the 17% inflation rate during 1947, and the concept "fiscal dominance". Whether or not the Fed has learned lessons from this historic period the references above show that the analysis of the fiscal policy, monetary policy, and question of central bank independence versus fiscal dominance are much more complex than what is described in the prelude to the question. Since World War 2 central banks have initiated Yield Curve Control w/o fiscal dominance. Fed has no mind to read so I agree an answer would be conjecture.  
> **username_1**: That is fine but if you are writing an answer to a question you should also consider actually providing answer the question, not just make a comment which corrects part of question (which can be part of the answer but is not answer itself), otherwise you are just commenting not answering the question, see our [help page on answering questions](https://economics.stackexchange.com/help/how-to-answer)  
> **username_4**: Fed has obviously learned that it can use unconventional monetary policy during the global financial crisis and the more recent pandemic crisis and the Bank of Japan has shown that it could reduce its balance sheet fairly rapidly. But those "lessons learned" are only implied in the facts. Fiscal dominance is not the cause of either Quantitative Easing or Yield Curve Controls when it is evident that such policies are initiated by the central bank making independent monetary policy decisions. The literature suggests monetary policy independence is an ideal that only sometimes manifests.  
> **username_5**: Given what has happened in the last 18 months, the question appears prescient.  The Fed is being criticized for continuing QE for too long during a period of post Covid fiscal expansion which also coincided with supply chain disruption.  It is also being accused of raising rates too slowly.  And, we have almost double digit inflation in the US.  Although it is not quite the same as post-war conditions, it certainly “rhymes”.  

---

