Fed Mulls Yield Curve Control to Support Credit Markets Amid Second Wave Threat By Investing.com

© Reuters.

By Yasin Ebrahim

Investing.com – Federal Reserve policymakers discussed measures to support the economy, including yield curve control to support credit markets amid concerns about the threat posed by the pandemic to its economic outlook when they met earlier this month as states battle to control the spread of the coronavirus, according to the Fed’s June meeting minutes released Wednesday.

Fed members discussed two tools for conducting monetary policy – when the federal funds rate is at its effective lower bound – including forward guidance and large-scale asset purchase programs in supporting employment and inflation and an approach that “cap or target interest rates along the yield curve,” the minutes showed.

Following their June 9-10 meeting, Fed officials left interest rates in the range of 0%-to-0.25% and signaled that near zero rates would continue through at least 2022.

In their post-meeting statement, they vowed to persist with bond purchases “at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”

The Fed committed to buying $80 billion a month in Treasuries and $40 billion a month in agency mortgage backed securities.

The Fed’s balance sheet has declined by $12.4 billion to $7.08 trillion as of June. 24, compared with the week prior, driven by a decline in demand for the Fed’s dollar swap lines from overseas central banks.

The U.S. central bank’s balance sheet stood at about $4 trillion just before the pandemic struck in the U.S. in early March.

Since the Fed’s last meeting, the U.S. has seen a greater resurgence in infections that has forced states to roll back plans to speed up the pace of reopening businesses. 

In testimony before the House Financial Services Committee on Tuesday, Federal Reserve Chairman Jerome Powell, acknowledged the threat of a potential second wave of infections on the economy.

A second wave could “force government and force people to withdraw again from economic activity … and “undermine public confidence, which is what we need to get back to lots of economic activity,” Powell said.

“Output and employment remain far below their pre-pandemic levels. The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” he added.

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