Economists and Federal Reserve watchers pitched the idea of ”yield curve control” over the summer. They were fired at the time, but the Fed minutes from last week suggest they could return.
Controlling the yield curve means the Fed would buy longer-term Treasuries to keep long-term rates lower. Most of its asset purchases now focus on short-term securities. This policy, combined with a stronger economy, has resulted in a steepening of the yield curve.
Last week’s Fed minutes (from the November 4-5 meeting) contained these key lines:
“Some market participants expected the Committee to eventually extend the weighted average maturity of the Federal Reserve’s purchases of Treasury securities.”
“While participants felt that immediate adjustments to the pace and composition of asset purchases were unnecessary, they recognized that circumstances could change to justify such adjustments. “
A change like this could hurt sentiment towards banking and financial stocks that benefit from a steep curve. Housing could be considered a beneficiary. It could also depress the US dollar and support high multiplicity tech stocks.
Fed Chairman Jerome Powell is appearing in Congress tomorrow and Wednesday. Even if he doesn’t discuss the change this week, it may gain importance in the future.
