And in March 2020, in response to Covid-19 pandemic and the following economic crisis, the Australia’s central bank started capping yields on 3-year government bonds at 0.25 percent, which triggered expectations that the Fed could follow suit.
What would the yield curve target imply for the monetary policy, economy and the gold market? Well, it’s not rocket science – capping bond yields means that bond yields will remain very low for longer that they would be without the caps. Importantly – oh, what a coincidence! – the Fed would cap Treasury yields, which would allow the government to continue its spending spree and to not worry about the fiscal deficits and soaring public debt.
Another issue is that the yield curve control flattens the yield curve, which hurts the commercial banks, which usually borrow short-term funds and lend long-term. So, a flat yield curve narrows their margins, impairing their lending ability, which is key to revive the economy.
Last but not least, the yield curve control can become very easily (if it’s not already) a blunt tool to help government issue debt smoothly and cheaply. As the FOMC admitted itself in minutes of its recent meeting, “monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.”
It should be clear now that the yield curve control should be positive for the gold prices, even if it would reduce the pace of the Fed’s balance sheet expansion (as in the case of the BoJ’s experience). After all, the caps on the Treasury yields imply low interest rates. Importantly, if inflation rises the cap on nominal interest rates would lead to the decline in the real interest rates, as it happened in the aftermath of the World War II. The yield curve control also caps the government’s borrowing costs, which encourage the increase in public debt, which raises the risk of the sovereign-debt crisis. Moreover, the yield curve control could spur some worries about the central bank’s independence, which could weaken the U.S. dollar. In such a macroeconomic environment, gold should shine. So, the Fed could cap the Treasury yields, while pushing gold upwards.
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Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.
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Fed Can Control Yield Curve. But It Can't Control Gold - FX Empire
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