Tuesday, July 7, 2020

June 2020 Yield Curve Update

The yield curve remains at about the same place it was a month ago.

Since the mid-March peak of optimism after the initial reactions to COVID-19, yields have declined, which would suggest that the Fed could do more in terms of basic nominal stimulus.  But, the decline in long-term yields has been real.  Inflation expectations have inched upward, though tepidly.

I don't have an opinion about the various lending programs in place, but it seems like there is plenty of room for the Fed to simply buy Treasuries until inflation expectations move above 2%.  A steeper yield curve would be a good sign.

In the meantime, the low point of the inversion looks like it's moving ahead in time, which is not a good sign.  Along with a steeper yield curve, it would be nice to see market expectations of sooner increases in short term rates.  The Fed can't cure COVID-19, but it can minimize the costs and dislocations caused by nominal decreases in incomes.  There is no reason for the Fed to let the market expect the yield curve to be inverted until 2022, but we might be headed there.

That being said, the Fed has been more active than what I would have expected.  I appreciate the new direction.  They aren't creating nominal economic crises like they did back in 2008.  But, there are parallels, still.  In 2008, during the month after Lehman Brothers failed, when markets were being tossed to and fro, and intensive debates raged about bailouts, TARP, and all the rest, the Fed sat on a 2% Fed Funds target rate - a target rate that was so disastrously high they never really managed to hit it.  In the midst of all the debates about unconventional policy efforts, it seems that it didn't occur to anyone to do conventional monetary policy and lower the rate.

We have sort of a similar issue now, with all the special lending programs, all the kvetching online about who got it and who didn't, etc., and in the meantime, the Fed could be purchasing many more Treasuries than they currently are.


  1. Yes, the Fed could buy more Treasuries. Maybe it should.

    But does any central bank buying more fungible sovereign bonds on gigantic globalized capital markets result in an increase in a particular nation's income and GDP?

    How does the Fed buying Treasuries boost aggregate demand inside the US?

    I think this is (in part) why we are seeing such thinkers as Stanley Fischer advocate for a Federal Reserve fiscal facility.

    1. It would have been more directly accurate for me to say they should create more federal reserve notes.

  2. I guess you are saying the Fed should create more Reserves at US commercial banks.

    Of course, as Scott Sumner says, then why is the Fed paying interest on excess reserves?

    And the second problem is, what if commercial banks do not feel like lending, for prudent reasons? Each commercial bank may have prudent reasons for pulling in its horns, but the cumulative effect is, of course, a catastrophe.

    I am finding myself less enamored by the "monetary policy only" approach to economic stimulus and NGDP LT.

    I think "monetary policy only" might work in good Ttmes in keeping things on track, but when you have an unusual situation, and certainly the present qualifies, then there is but little choice but to spend lots of money.

    The nice thing is, evidently, the Federal Reserve can monetize get without inflationary consequence.

    The other nice thing is that in macroeconomic debate, no one is ever wrong.

    1. I think growth in currency would be a better sign of monetary stimulus than higher reserves, though all those measures are muddied by the current set of tools.

    2. Then...would sending every resident $1000 digital cash be a good idea?

  3. https://www.spglobal.com/ratings/en/research/articles/200720-economic-research-hong-kong-s-trend-growth-to-more-than-halve-by-2030-11579092

    A long way to go for us "housing lives matters" types.

    A lengthy report on the economic outlook for HK...not a paragraph, not a word on housing...

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  5. The Fed's balance sheet has indeed grown significantly: it has increased by $ 2.8 trillion since the beginning of March and now stands at about $ 7 trillion, but the bulk of the increase came from Treasury bonds and mortgage-backed securities (MBS), which are also protected by government guarantees. At the same time, the total volume of risky non-financial debt, which the Fed was going to buy, turned out to be "tiny" on the Fed's balance sheet, Cecchetti and Schonholz write: $ 39 billion as of July 1, or 1.4% of the balance increase since the beginning of March.