Macro Strategy Views: The Fed’s forward guidance and YCC – will it work?
The Fed learned the importance of explicit and aggressive forward guidance at an early stage in the GFC, tied either to specific dates or to economic outcomes. The current forward guidance is weak as it is neither explicit nor aggressive. Therefore, the Fed is eager to strengthen forward guidance. The guidance could target inflation above 2%, and involve asset purchases, the Fed funds rate and possibly yield curve control (YCC). It could cap 3Y UST yields at 0.25% with the purpose of reinforcing guidance on forward rates and asset purchases. We discuss the gains and pitfalls of such a policy. Global Head of FI&C Research Thomas Harr chairs today’s podcast and he is joined by Senior Analyst Mikael Olai Milhøj and Senior Analyst Jens Nærvig Pedersen.