The Federal Reserve’s response to COVID-19 (4/4)

The FED could adopt the Yield Curve Control (YCC) policy to ensure short term protection of the US economy’s debt, preventing a collapse of activity. Yields have been increasing over long-maturing loans which explained by the increased risk, due to inflation.

Inflation is expected to rise considerably which will discourage people to take loans as interest rates will also increase. The danger is exacerbated as the US economy is hugely overleveraged, so taking on new debt is the most efficient method of payment. If interest rates rise, then the economy will inevitably collapse as the cost of borrowing for corporations and the US government will increase.

This policy indicates that the FED would be acting to prevent risk in the long run in the event of future inflation or rises in interest rates The FED could prevent this from occurring by using YCC. The FED will purchase government-backed debt and U.S Treasurys to inhibit yields from growing to unsustainable levels. After the pandemic, a massive boom in spending will likely incur growth in inflation, exacerbated by Biden’s stimulus package.

Yield Curve Control will ensure in the short term that debt will not increase whilst maintaining lower interest rates. It will lead to a growth in corporate bond markets as an alternative to government bonds with suppressed yields, eventually enabling investment, YCC has been adopted by the Bank of Japan successfully and since 2016, interest rates have remained low. If the FED implement this policy, they will be able to influence debt and the rate of inflation.