Will Fed Go to Yield Curve Control?

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Yield curve control ahead?
Cable hist 3 month highs
Nikkei 0.15% Dax 0.13%
UST 10Y 0.80
Oil $38/bbl
Gold $1719/oz
BTCUSD $9748

Asia and the EU
No data

North America Open
USD CPI 8:30
USD Fed decision 14:00

Markets lost their oomph in early European trade with futures surrendering the gains in Asia as traders awaited the FOMC decision at 18:00 GMT today.

Index futures turned negative into morning Frankfurt dealing as profit-taking and risk-off flow dominated. After a massive run-up in equities that included all-time highs for Nasdaq yesterday, the markets appear to be in a more cautious mood as they await Mr. Powell and company.

As we noted earlier this week, the risk rally ramp into the Fed day may be followed by a selloff if the market does not see any additional stimulus moves by US monetary officials. Every market player is specifically focused on the possibility of Fed enacting yield curve control.

Yield curve control would be a natural move for the US policymakers who are averse to moving to negative rates but at the same time need a mechanism to keep US interest rates as low as possible in order to maintain the massive deficit spending that is occurring at this time.

The key question is whether the Fed will commit to such action at this meeting or perhaps take a wait and see for a few months. Any non-action by the Fed will be viewed as an effective tightening of monetary policy and could send stocks plunging in a profit-taking stampede after the huge gains over the past few weeks.

But Mr. Powell is very likely to be circumspect and will most certainly assure the markets that the Fed remains in an ultra-accommodative mode and stands ready to provide liquidity when necessary.

In FX, the majors are already anticipating a dovish message with cable hitting 3-month highs against the buck in late Asian trade while EURUSD continues to eye the 1.1400 figure. If the Fed does surprise the market by making a formal announcement on yield curve control today the moves in FX are likely to be the most violent to the upside with EUR/USD barreling through 1.1400 and perhaps even 1.1500 levels as US yield advantage withers away.

Boris Schlossberg
Managing Director

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