Yield Curve Control? Why Not...

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By Peter Tchir of Academy Securities

There is a lot of chatter surrounding the Federal Reserve. The FOMC, etc. What the President will or will not do. What can be “successfully” done or not. Will Powell be fired?

Today, Kevin Warsh is floating the idea of better aligning the Fed and Treasury, as has been the case in the past (so I’m told).

Most of the analysis about what may happen tends to fall along the lines of:

  • Probably cannot “fire” Powell anyways.
  • Even if Powell is “fired” it is a committee and the committee won’t do anything drastic.
  • The front end might rally a bit, but “we” will lose control over the long end.

    • Why not think more outside the box? There are a few things we know:

  • The President thinks rates are too high.
  • The President (and Bessent) are focused on the 10-year and believe that is also too high.
  • The President has no problem (at least on tariffs) dictating specific numbers.

    • Why would this administration only do something halfway?

    If you are going to do something radical – why not go all the way?

  • Cut interest rates – by ensuring the Chair and Committee are on board with it. I cannot say that I’ve given any thought to how to reset the committee, but I’d be surprised if that was more difficult than making changes at the top of the house?
  • And there are people on the committee who already have more rate cuts in their “dots” than is priced in. It may also be safe to presume that if the Chair was dovish, some people might move their dots, as a cut here or there is already probably too precise for all the guesswork involved.
  • Align the Fed and Treasury. Seems strange, but is it really that wild?
  • If rates out the curve don’t perform as expected (move significantly lower in response rate cuts) then why not just “set the curve”? The Fed has done QE (bought treasuries). The Fed has done Operation Twist (bought/sold treasuries to influence the shape of the curve). It isn’t the first time since the GFC that we’ve chatted about the potential for yield curve control: if the Fed is going to set rates in a world where longer term rates are likely more important than short term rates, why not set those too?

    • Who knows if anything will happen. But presumably, by May of next year at the latest (and that seems like a lifetime away) we will see changes in how the Fed behaves.

    I’m not arguing against Fed independence and the dual mandate, etc., but you can see the appeal of going in a different direction.

    Set yields across the curve. Issue debt to take advantage of these yields. Save “trillions” in interest rate expense. There is no easier way to lower projected annual deficits than by reducing costs. That would actually help lower yields too.

    If long end treasury yields cannot bear the brunt of potential reckless Fed policy (because of yield curve control) then the dollar will likely be hit hard.

    Yeah, there is always “strong dollar” rhetoric, but imagine a world with higher tariffs AND a cheaper dollar? Imports look way more expensive and the U.S. exports start to look a lot cheaper.

    A materially weaker dollar may be viewed as a “feature” not a “bug” if your primary goal is more manufacturing in the U.S.

    Again, no idea how this will play out, but expecting only one “radical” move seems a little “naïve”? If you are going to reshape something (like monetary policy) why not reshape it all the way?

    In any case, maybe we should be spending less time thinking about “how much steeper will the yield curve go” if something happens to the Fed, to what would you do to ensure long end yields don’t rise?

    Just thinking out loud, but if we are going to get “radical” why wouldn’t we get really radical?

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