Introduction of YCC (Yield Curve Control).

Yield curve control or YCC (sometimes called YCT) is aimed to control treasury yields at a certain target. FFR or fed fund rate is an interest rate of very short maturity and can be regarded as call rates. YCC is positioned to target at longer bonds by imposing interest rate caps at a certain rate.

When bond price soars high (remain above the floor), then central bank sells the treasury or does nothing at all. However, if the bond price fall and interest rates surge, then the central bank purchases the bond at a higher price. That can be one of the announcement effect that can let investors buy the bonds beforehand, expecting the bonds to be sold by central bank at a higher price. YCC or YCT is used to remain interest rates near zero. (It has strength of maintaining interest rate zero without expanding Fed's balance sheet)

Past week, Fed announced about monetary policy plans, remaining federal funds rate near zero until average inflation reaches and remains over 2 percent "over time".  Please see my blog down below.
https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

However, YCC is not very easy to apply right now. In the recent economic and financial environment, the control is not a good function for 'added fuel'. Two-year treasury note yield is 16 basis point, five-year bond yield is 30 bp, and ten year of 64bp. There is no much room to pull the yields down; if needs targeting, then it should be 30 year maturity. (targeting long term has risk of austerity or tightening).

James Bullard, the CEO of St.Louis Fed is worrying about the exit of the policy. The essential target of YCC is pulling down the yields that the bonds have. When the yields remain zero with the effect and later consider about exiting from YCC, market has to prepare aftermath. (Cold turkey phenomenon) YCC is for strengthen the 'forward guidance' that Fed can do to stabilize the market, removing the panic of mom-and-pop investors or financial institution. The rise of YCC was due to the climb of long term treasury yield after Fed announce to ease money on short-term market (call or repo).

U.S. has proceeded YCC during second World War times(1940) by incurring massive debt expenditures. Mr. Bernanke mentioned yield cap in 2002 to terminate deflation cause. In 2010, Fed announced to target at around 0.1% after financial crisis. Japan adopted YCC in 2016 and Australia in 2020.


Source: Saint Louis Fed
https://www.stlouisfed.org/on-the-economy/2020/august/what-yield-curve-control

Source: Global Monitor
https://now.globalmonitor.co.kr/view.php?ud=2020090107371593171a6a872ef5_41

https://now.globalmonitor.co.kr/view.php?ud=2020090107363630891a6a872ef5_41