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The Incoherence Of Yield Curve Control

The Incoherence Of Yield Curve Control



Chart: Long-Term Treasury Yields And Yield Cap

Yield curve control -- setting bond yields by the central bank -- has returned to discussion. Mainstream economics over-emphasises the role of interest rates in guiding the economy, and based on previous experience, it seems entirely likely that some form of new policy will be attempted to counter-act economic weakness. The main options appear to be negative interest rates and yield curve control, and it seems clear that Fed officials prefer yield curve control to negative rates, Yield curve control will either accomplish very little, or be viewed as a mistake in retrospect. That said, it is still a more sensible policy that large scale purchases of Treasurys by the Fed (Quantitative Easing).

From the perspective of Modern Monetary Theory (MMT), this topic is interesting, since fixing term interest rates has a strong resemblance to a proposed policy of locking interest rates at zero. However, the implementation that would be used by the Federal Reserve would be the wrong way to do it, and missing the point of the policy.

Setting a trading range for Treasury yields is not unprecedented policy for the Fed. Even if we put aside recent experiments elsewhere, Treasury yields were capped at 2.5% during World War II and the immediate post-war era. I discussed this very quickly in one of my very early posts, which also linked references on the topic. Keynes also referred to such a policy in the General Theory.


Setting an upper bound for Treasury yields is a straightforward operation for the Federal Reserve: it just announces the cap level, and purchases Treasurys without quantity limitations whenever yields push near that level.

So long as the long-term yield is higher than the overnight rate (in particular, the repo rate) and nobody expected the cap to be lifted, investors will do most of the heavy lifting. They will buy the bonds at yields below the cap level, and they can finance the positions with positive carry. There is very little risk for the investors, so long as they can sell the bonds to the Fed at the capped rate. This is like any other peg set by a central bank -- as long as the peg is credible, it will not need to intervene too aggressively for the peg to hold.

However, if investors expect the peg to disappear and yields to rise significantly above the cap, they will not be willing to hold the bonds. In that case, the Federal Reserve could be forced to buy up the entire stock of issued Treasury bonds.

By providing a price signal, this policy is more effective than purchasing volumes of Treasurys (Quantitive Easing), since market participants had zero guidance on what level of Treasury yields the Fed wanted to achieve.

A Potential Nothingburger

Chart: Slope of 2-Year Treasury over Fed Funds Target
One potential implementation of yield curve control is to only cap yields up to a certain point of the curve, for example, the 2-year. Such a policy would be easily rolled off. For example, imagine that the policy is put into place until 2023. At which point, the cap would apply to bonds maturing in 2025. All that needs to be done is then not roll that maturity date forward, and so the policy would have been exited by 2025.

However, such a policy accomplishes very little in practice. The figure above shows the slope between the Fed Funds target rate (midpoint of a band when the Fed switched to using a band) and the 2-year Treasury. If we look at the mid-2010s, we see that the slope was negligible. This is what one would expect in an economy that is stagnant. The only thing such a policy would prevent was the knee-jerk selloffs that resulted from bond investors over-reacting to Fed rate cuts (as in 2010). Given the magnitude of the economic contraction, I doubt that a similar sell-off could be engineered any time soon.

But even if such a sell-off materialised, pushing rising forward rates more than two years into the future will not accomplish much. Term borrowing rates would rise, which is what the Fed presumably wants to avoid.

Capping Long-Dated Bonds Trickier to Exit

To be more interesting, Treasurys of all maturities would need to have a yield cap. The problem is straightforward: if you cap a 10-year note yield, it will not be possible for the policy to naturally roll off for about a decade (since a cap on a one-year is not too significant).

Realistically, the Fed would have to abandon the policy in a way that has bonds jumping from capped status to floating yields. Unless the Fed is willing to buy every bond holder out, widows and orphans will show up and burn the effigies of Fed officials on the steps of the Federal Reserve headquarters.

How Will it Affect the Economy?

I am in the camp that lowering rates by small amounts will do very little to stimulate growth, and we can look at recent cycles for evidence for that assertion. Furthermore, capping Treasury yields may matter little if the Fed is forced to buy a large portion of the float, pushing everyone else into riskier securities. Credit spreads would just peel off from the Treasury curve, and thus there would be no benefit to private sector borrowing costs.

The effect may be more psychological, as was the case for Quantitative Easing. Hard money advocates will scream about "price discovery," and insist that hyper-inflation is around the corner. This might generate some frantic investment activity, which may or may not add to aggregate demand. However, that is what happened in response to "money printing" worries in the last cycle, and the recovery was still notoriously slow.

Major Contrast with MMT Policy

 One might argue that capping Treasury yields would open policy space for fiscal policy. This is not really the case. "Fiscal space" is a psychological construct of policymakers, and the elites in charge of fiscal policy would much prefer that monetary policy do the heavy lifting. People would very reasonably argue that bond yields would spike when the yield curve cap is lifted, and so the Treasury cannot extrapolate the current low level of yields forever.

By contrast, the MMT proposal is based upon the premise that monetary policy is weak, and is to be taken out of the picture permanently. With rates locked at 0% by statute, there is no "yields will spike, leading to a fiscal death spiral" story to sell.

Yield curve control is in an unhappy middle ground. It is an admission that lowering the policy rate does very little, but by leaving the alleged threat of an "independent" central bank driving the Treasury into bankruptcy in place, fiscal policy remains knee-capped. (I don't believe the stories that the Fed has the right to drive the Treasury into bankruptcy, but many fiscal conservatives do not let facts get in the way of their campfire scare stories. What matters is what the fiscal policymakers believe.)

Concluding Remarks

Barring a miracle cure for COVID-19, the United States is drifting into a multi-year period of extremely depressed activity. There does not appear to be capacity to eradicate the virus, nor are older consumers or office workers willing to take meaningful health risks to benefit capitalism. Unless there is a magical transformation in the attitudes of the ruling elites, the fiscal policy response will remain reactive, and ineffectual. The Fed is the only entity in the United States that takes any responsibility for the effectiveness of policy, and so we should expect to see greater leaps in its policy framework.

Although yield curve control is the most likely next step, negative interest rates cannot be ruled out. Health worries might strengthen the hand of those advocating the abolishing of paper money, removing one institutional barrier to negative interest rates.

(c) Brian Romanchuk 2020

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Spread & Containment

War, peace and security: The pandemic’s impact on women and girls in Nepal and Sri Lanka

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to improve the lives of women and girls in postwar countries…



Nepalese girls rest for observation after receiving the Moderna vaccine for COVID-19 in Kathmandu, Nepal. (AP Photo/Niranjan Shrestha)

Attention to the pandemic’s impacts on women has largely focused on the Global North, ignoring countries like Nepal and Sri Lanka, which continue to deal with prolonged effects of war. While the Nepalese Civil War concluded in 2006 and the Sri Lankan Civil War concluded in 2009, internal conflicts continue.

As scholars of gender and war, our work focuses on the United Nations Security Council Resolution 1325 on women, peace and security. And our recently published paper examines COVID-19’s impacts on women and girls in Nepal and Sri Lanka, looking at policy responses and their repercussions on the women, peace and security agenda.

COVID-19 has disproportionately and negatively impacted women in part because most are the primary family caregivers and the pandemic has increased women’s caring duties.

This pattern is even more pronounced in war-affected countries where the compounding factors of war and the pandemic leave women generally more vulnerable. These nations exist at the margins of the international system and suffer from what the World Bank terms “fragility, conflict and violence.”

Women, labour and gender-based violence

Gendered labour precarity is not new to Nepal or Sri Lanka and the pandemic has only eroded women’s already poor economic prospects.

Prior to COVID-19, Tharshani (pseudonym), a Sri Lankan mother of three and head of her household, was able to make ends meet. But when the pandemic hit, lockdowns prevented Tharshani from selling the chickens she raises for market. She was forced to take loans from her neighbours and her family had to skip meals.

Some 1.7 million women in Sri Lanka work in the informal sector, where no state employment protections exist and not working means no wages. COVID-19 is exacerbating women’s struggles with poverty and forcing them to take on debilitating debts.

Although Sri Lankan men also face increased labour precarity, due to gender discrimination and sexism in the job market, women are forced into the informal sector — the jobs hardest hit by the pandemic.

Two women sit in chairs, wearing face masks
Sri Lankan women chat after getting inoculated against the coronavirus in Colombo, Sri Lanka, in August 2021. (AP Photo/Eranga Jayawardena)

The pandemic has also led to women and girls facing increased gender-based violence.

In Nepal, between March 2020 and June 2021, there was an increase in cases of gender-based violence. Over 1,750 incidents were reported in the media, of which rape and sexual assault represented 82 per cent. Pandemic lockdowns also led to new vulnerabilities for women who sought out quarantine shelters — in Lamkichuha, Nepal, a woman was allegedly gang-raped at a quarantine facility.

Gender-based violence is more prevalent among women and girls of low caste in Nepal and the pandemic has made it worse. The Samata Foundation reported 90 cases of gender-based violence faced by women and girls of low caste within the first six months of the pandemic.

What’s next?

While COVID-19 recovery efforts are generally focused on preparing for future pandemics and economic recovery, the women, peace and security agenda can also address the needs of some of those most marginalized when it comes to COVID-19 recovery.

The women, peace and security agenda promotes women’s participation in peace and security matters with a focus on helping women facing violent conflict. By incorporating women’s perspectives, issues and concerns in the context of COVID-19 recovery, policies and activities can help address issues that disproportionately impact most women in war-affected countries.

These issues are: precarious gendered labor market, a surge in care work, the rising feminization of poverty and increased gender-based violence.

A girl in a face mask stares out a window
The women, peace and security agenda can help address the needs of some of those most marginalized. (AP Photo/Niranjan Shrestha)

Policies could include efforts to create living-wage jobs for women that come with state benefits, emergency funding for women heads of household (so they can avoid taking out predatory loans) and increasing the number of resources (like shelters and legal services) for women experiencing domestic gender-based violence.

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to achieve the agenda’s aims of improving the lives of women and girls in postwar countries like Nepal and Sri Lanka.

Luna KC is a Postdoctoral Researcher at the Research Network-Women Peace Security, McGill University. This project is funded by the Government of Canada Mobilizing Insights in Defence and Security (MINDS) program.

Crystal Whetstone does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Target Sets Sights on Holiday Season, Has Plan for High Inventory

Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.



Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

Target's  (TGT) - Get Target Corporation Report strategy is paying off as the company's stock falls on heavy volume following its earnings release. 

Normally, a profit miss as wide as Target's, 39 cents per share vs. expectations of 72 cents per share, would result in a bigger drop than Target's, but the retailer has been prepping the market for this miss all summer. 

The inventory the company built up during the height of the pandemic, as Americans shopped more from home, needs to go, and the only way get rid of the excess product is deep discounts. 

"Back in June, we announced that our team would be undertaking a bold effort to rightsize our inventory position in the categories for which demand patterns have radically changed," CEO Brian Cornell said during the company's earnings call. "While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward."

Now, looking forward the company sees some overhang for the third quarter, but expects a big holiday season ahead. 

While some fear a recession and what it might do to the economy, Target is convinced that the holiday season will be strong.

Image source: John Smith/VIEWpress.

Target Aims for Holiday Season

While Target is focused on the back-to-school season currently underway, the company expects "spillover" from its inventory issues to be present during the third quarter to the tune of $200 million. 

But the company's own checks suggest that its shoppers are excited about the holiday season. 

"The one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons so we certainly expect that they are going to be celebrating Halloween this year and actively trick or treating and hosting parties with friends and family," Cornell said.

"We know they're looking forward to Thanksgiving and they're going to look forward to celebrating the Christmas holidays and that comes down each and every week as we survey consumers and talk to our guests so that gives us great optimism for our ability to perform during these key holiday seasons"

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Not only does Target expect a strong quarter, but the company also expects favorable comps as fourth quarter headwinds from a year ago aren't present this time around. 

"Guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond," Cornell said.

Target's Q2 Collapse

Target said adjusted earnings for the three months ending in July were pegged at 39 cents per share, down 89% from the same period last year and well shy of the Street consensus forecast of 72 cents per share.

Group revenues, Target said, rose 3.5% to $26 billion, essentially matching analysts' estimates of a $26.04 billion tally. Target said same-store sales rose 2.6%, again shy of the Refinitiv forecast of 3.2%, while operating margins fell to 1.2%, below the group's July guidance of a 2% level. 

Earlier this summer, Target cautioned that its bigger-than-expected 35% build-up in overall inventories over the first quarter would trigger price cuts, adding that deeper discounts would be needed to shift the excess goods onto a customer base that was already pulling back on discretionary spending.

Walmart  (WMT) - Get Walmart Inc. Report, Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.

Walmart said adjusted earnings for the three months ended in July came in at $1.77 per share, down one penny from the same period last year but well ahead of the Street consensus forecast of $1.62 per share.

Group revenues, the company said, were tabbed at $152.9 billion, an 8.4% increase from last year that topped analysts' estimates of $150.81 billion. U.S. same-store sales rose 6.5% from last year, the company said, firmly topping the Refinitiv forecast. 

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Why Is No One at Nike Working This Week?

And will the move gain broader acceptance among American employers?



And will the move gain broader acceptance among American employers?

You go into an office, pull at the door and find that it doesn't give and nobody's there. 

It may sound like the start of the common rushing-to-the-office-on-a-Saturday nightmare but, more and more, collective time off is being embraced by employees as part of a push for a better work culture.

While professional social media platform LinkedIn  (MSFT) - Get Microsoft Corporation Report and dating app Bumble  (BMBL) - Get Bumble Inc. Report had already experimented with collective time off for workers, the corporate ripples truly began with Nike  (NKE) - Get Nike Inc. Report.

In August 2021, the activewear giant announced that it was giving the 11,000-plus employees at its Oregon headquarters the week off to "power down" and "destress" from stress brought on by the covid-19 pandemic.

"In a year (or two) unlike any other, taking time for rest and recovery is key to performing well and staying sane," Matt Marrazzos, Nike's senior manager of global marketing science, wrote to employees at the time.

Nike Is On Vacation Right Now

The experiment was, not exactly unexpectedly, very well-received — a year later, the company instituted its second annual "Well-Being Week." Both the corporate headquarters in Beaverton, Ore., and three Air Manufacturing design labs with over 1,500 employees are closed for a collective paid vacation from Aug. 15 to 19.

"We knew it would be impactful, but I was blown away by the feedback from our teammates [...]," Nike's Chief Human Resources Officer Monique Matheson wrote in a LinkedIn post.

"Because everyone was away at the same time, teammates said they could unplug – really unplug, without worrying about what was happening back at the office or getting anxiety about the emails piling up."


Of course, the time off only applies to corporate employees. To keep the stores running and online orders fulfilled but not exacerbate the differences between blue and white collar workers, Nike gave its retail and distribution employees a week's worth of paid days off that they can use as they see fit.

Nike has tied the change to its commitment to prioritize mental health. In the last year, it launched everything from a "marathon of mental health" to a podcast that discusses how exercise can be used to manage anxiety and depression.

Rippling Through the Corporate World?

But as corporations are often criticized for turning mental health into positive PR without actually doing much for employees, the collective week off was perhaps the most significant thing the company did for workers' mental health.

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The practice of set office closures has long been common practice in many European countries. In France, not only corporate offices but even restaurants and retail stores empty out over the month of August for what is culturally considered sacred vacation time. 

But as American work culture prioritizes individual choice and "keeping business going" above all else, the practice has been seen as radical by many corporate heads and particularly small businesses that may find it more difficult to have such a prolonged drop in business. 

But in many ways, the conversations mirror some companies' resistance to remote work despite the fact that one-fourth of white-collar jobs in the U.S. are expected to be fully remote by 2023

"This is the kind of perk that makes employees want to stay," industry analyst Shep Hyken wrote in a comment for RetailWire. "And knowing they can’t completely shut the entire company down, I like the way they are compensating the distribution and retail store employees."

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