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Opaque
The July FOMC minutes had an outsized impact on risk sentiment Thursday, as global equities retreate
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I don’t agree with Kevin’s “Therefore, make no mistake — we will eventually get YCC.” He points out that the exit strategy from YCC is difficult to see. In addition, the Fed could act to achieve YCC without ever taking ownership and adjust policy if inflation increases too much. Look at what the St. Louis Fed wrote: “In combination with rising debt from the U.S. entering the Korean War in 1950, the peg on longer-term rates contributed to faster money growth and increased inflationary pressures. In 1951, annualized inflation was over 20%, and monetary policymakers insisted on combating inflation.” What member of the FOMC wants to be held responsible (by history) for this possibility. The Fed can write checks without limit; if buying a few extra bonds is the price of not announcing a YCC policy (but controlling yields), who cares?
The other thing to keep in mind is that while YCC can, as Kevin suggests, destroy the market (the JGB market at one point damn near stopped trading), it can also mean buying less bonds, as the market simply gives up trying to test the patience of the folks with the printing press. The RBA showed that this year, and the BoJ has actually stealthily tapered bond buying since YCC was implemented. Still, Kevin’s points about market functioning are obviously true, and that sets up the potential for tantrum events if there’s nobody home to trade.
Buying fewer bonds seems like the least important issue here; the Fed owns the printing press. History suggests that exiting an explicit YCC policy is difficult. I think RBA could exit fairly painlessly because Australia is a “tiny” economy; Japan is a different matter and I think the BOJ is stuck. Frankly, I am confused by the reference to “buying less bonds” because it doesn’t matter. The Fed could buy (or sell) whichever bonds it wishes and keep yields in a range without an acknowledged YCC policy and abandon this when necessary. (Would this be “dishonest”? Of course. What isn’t “dishonest” about the current market?) YCC could also become a political football; can you have MMT without YCC? (I don’t understand MMT well enough to reach any conclusions.)
Market functioning is critical in my opinion but I don’t know if it currently exists in the bond market. This stock market, economy, bond market, political mess, medical situation, etc make me realize my utter ignorance. What good are mathematical models in this situation? It feels like being a baseball coach at first base who doesn’t expect A10s to strafe the field.