With YCC About To Come Back Up, A Look At It Down Under

Long end UST yields on the rise with reflation-y factors taking more of a hold, last year’s postponed YCC flirtation is almost certain to be rekindled over the weeks ahead. We’ve been told how it’s really simple, meaning low interest rates are stimulus and this must be maintained without fail. But what’s really been responsible for all the failing?

When I hear the term “yield curve control”, I immediately think of Richard Fisher. The last thing any central banker or supporter of conventional monetary policy wants is to be so closely identified with the former Dallas Fed President. Proven time again to misunderstand what the central bank actually does, to the point of confusion over what bank reserves actually represent, yet it was this particular Texan who confounded his more plugged-in colleagues at the FOMC with his toddler-simple wit at least when it came to this bond purchasing stuff.

MR. FISHER. In summary, I want to mention that, as I said earlier, most of these variations that have been suggested are very un-Bagehot-like. And what I mean by that is, twisting [or QE and yield caps] entails purchasing assets that investors are fleeing toward, not assets that they are fleeing from. [emphasis added]

By that he meant the very basics; monetary officials tell the public all the time that bond buying (QE) is why interest rates have ended up going lower, and that lower interest rates are powerful stimulus. Put those two things together and monetary policy employing QE must be awesome.

So, here was Fisher pouring cold water all over that neat little theory by his simplistic notion of some real scientific observation; why are we buying the same assets everyone else already is?

The immediate theoretical implication is equally obvious as is this contradiction. Just who, then, is actually responsible for lowering interest rates? And if it doesn’t end up being policymakers, what do low interest rates actually signify?

Should you read any of the mountain of uninspiring central bank-sponsored academic literature, which seeks every plausible manner to attribute positive effects to the overlords’ policies, this is why they can’t say for certain there’s much to this bond buying business.

At best, scraping the bottom of the barrel, maybe rates end up even lower than they already would have been. It’s the yield equivalent of being reduced to claiming how QE “saved” rather than clearly created jobs. Sure, the market got interest rates way down, but maybe the central bank got them a little lower, too, and that perhaps could make a big difference (or something).

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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