This website uses cookies.
Cookies improve the user experience. You can change the cookies acceptance settings for this website.

News

Economic Study 7/27/2020

An update on the yield curve control in the US

Cavalier_Bruno_2.png
Bruno Cavalier
Chief Economist at ODDO BHF

 

The US economy is exposed to two immediate threats, the first from the virus, the second from the fiscal cliff. The pandemic is seeing another upsurge and Congress has not (yet) decided to extend support to households. After a sharp rebound in May and June, demand has tended to level off in recent weeks. There is a risk that the economy could stall or even relapse. What can the Fed do to minimise this risk? Keeping policy interest rates at zero, providing the necessary liquidity, extending the QE are a given. Some members of the FOMC would also like to strengthen the guidance on longer rates via some "yield curve control". Here we take stock of this key debate for the future of US monetary policy.

The week's focus

After strengthening in May and June, the US economy is showing signs of weakness again. The pandemic had subsided from April to early June, suggesting that the worst was over, but since then it has gained ground in a large swathe of the country. Restrictions on the use of certain commercial premises have been reinstated here and there. In recent weeks, mobility indicators have shown that households are more cautious, staying at home more. This is leading to a moderation of their spending, as reflected in the volume of credit card purchases. The decline in jobless claims has also slowed markedly. On the other hand, there is a fiscal cliff risk, i.e. that the exceptional measures to help the unemployed may not be extended, at least not in full (see p.3). These measures are scheduled to expire at the end of the month. As is often the case, partisan disagreements over the amount and content of the next budget package may only be overcome at the eleventh hour. This is stoking the climate of uncertainty and magnifying the downside risks to activity, employment and inflation.

What can the Fed do to minimise these risks? In the short term, it will continue along the path it has followed in recent months, i.e. of keeping policy rates at zero, serving liquidity needs without restrictions and extending its asset purchase policy. The Fed's assets totalled $ 4,174bn at the start of the year. They rose by $ 3,000bn (+72%) to its recent peak in mid-June. Since then, the balance sheet has tended to shrink (chart lhs). This should not be interpreted as the Fed's desire to tighten its policy, but merely the fact that the markets have returned to their normal functioning, implying a reduced need for liquidity. In particular, the Fed stopped its special repo operations and reduced its dollar swap lines with the major foreign central banks. All told, financial conditions have returned to their pre-pandemic state (see chart rhs).

download.jpg
Discover the full report

Conflict of interests:

ODDO BHF CORPORATES & MARKETS, a division of ODDO BHF SCA, limited sharepartnership - Bank authorised by ACPR. ODDO BHF and/or one of its subsidiaries could be in a conflict of interest situation with one or
several of the groups mentioned in this publication. Please refer to the conflict of interests section at the end of this document.
Le présent document n'est pas un document contractuel; il est strictement destiné à l'usage privé du destinataire. Les informations qu'il contient se fondent sur des sources que nous estimons fiables, mais dont nous ne pouvons
garantir l'exactitude ni l'exhaustivité. Les opinions exprimées dans le document sont le résultat de notre évaluation à la date de la publication. Elles peuvent donc être révisées à une date ultérieure.

 

Disclaimer:

Disclaimer for Distribution by ODDO BHF SCA to Non-United States Investors:
This research publication is produced by ODDO BHF Corporate & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”).
The research, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This research has been prepared in accordance with regulatory provisions designed to promote the independence of investment research. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest. This research has been prepared in accordance with French regulatory provisions designed to promote the independence of investment research. The recommendation presented in this document is reviewed and updated at least quarterly following each Quarterly Report published by the issuer that is the subject of this Research Report.
At the time of publication of this document, ODDO and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The views expressed in this Research Report accurately reflect the analyst’s personal views about the subject securities and/or issuers and no part of his compensation was, is, or will be directly or indirectly related to the specific views contained in the Research Report. This Research Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This Research Report is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Disclaimer for Distribution by Oddo New York to United States Investors:
This Research Report is produced by ODDO BHF Corporate & Markets, a division of ODDO. This research is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. customers of ONY and cannot be divulged to a third-party without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This research has been prepared in accordance with regulatory provisions designed to promote the independence of investment research. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest. This research has been prepared in accordance with French regulatory provisions designed to promote the independence of investment research. The recommendation presented in this document is reviewed and updated at least quarterly following each Quarterly Report published by the issuer that is the subject of this Research Report.
At the time of publication of this document, ODDO, and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The views expressed in this Research Report accurately reflect the analyst’s personal views about the subject securities and/or issuers and no part of his compensation was, is, or will be directly or indirectly related to the specific views contained in the Research Report. This Research Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This Research Report is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Rule 15a-6 Disclosure:
Under Rule 15a-6(a)(3), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this foreign research must be effected through ONY. As a member of FINRA, ONY has reviewed this material for distribution to U.S. persons as required by FINRA Rules 2241(h) applicable to dissemination of research produced by its affiliate ODDO.
FINRA Disclosures:
• Neither ONY, ODDO, nor ODDO BHF Corporate & Markets beneficially owns 1% or more of any class of common equity securities of the subject company.
• The research analyst of ODDO BHF Corporate & Markets, at the time of publication of this research report, is not aware, nor does he or she know or have reason to know of any actual, material conflict of interest of himself or herself, ODDO, ODDO BHF Corporate & Markets or ONY, except those mentioned in the paragraph entitled “Risks of Conflicts of Interest.”
• ODDO BHF Corporate & Markets or ODDO may receive or seek compensation for investment banking services in the next 3 months from the subject company of this Research Report, but ONY would not participate in those arrangements.
• Neither ONY, ODDO, ODDO BHF Corporate & Markets has received compensation from the subject company in the past 12 months for providing investment banking services except those mentioned in the paragraph of “Risks of Conflict of Interest”.”
• Neither ONY, ODDO, ODDO BHF Corporate & Markets has managed or co-managed a public offering of securities for the subject company in the past 12 months except those mentioned in the paragraph of “Risk of Conflict of Interest”.
• ONY does not make (and never has made) markets and, accordingly, was not making a market in the subject company's securities at the time that this research report was published.
Regulation AC: ONY is exempt from the certification requirements of Regulation AC for its distribution to a U.S. person in the United States of this Research Report that is prepared by an ODDO BHF Corporate & Markets research analyst because ODDO has no officers or persons performing similar functions or employees in common with ONY and ONY maintains and enforces written policies and procedures reasonably designed to prevent it, any controlling persons, officers or persons performing similar functions, and employees of ONY from influencing the activities of the third party research analyst and the content of research reports prepared by the third party research analyst.
Contact Information of firm distributing research to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Philippe Bouclainville, President (pbouclainville@oddony.com) 150 East 52nd Street New York, NY 10022 212-481-4002.
Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s .