Intended to Curb the Sharp Rise in Long-Term Bond Yields
CNBC: "An Effective Measure to Alleviate Market Inflation Concerns"
[Asia Economy Reporter Kim Suhwan] Recently, as long-term U.S. Treasury yields have risen sharply, raising concerns about inflation, there is speculation that the U.S. Federal Reserve (Fed) will adjust its bond assets to stabilize interest rates.
On the 1st (local time), CNBC reported that experts expect the Fed to decide to change its asset composition at the Federal Open Market Committee (FOMC) meeting on the 16th as a measure to stabilize bond yields. This outlook comes as long-term yields, such as the 10-year Treasury yield, have shown a steep upward trend, prompting expectations of such a response.
One of the measures experts anticipate from the Fed is the so-called 'Operation Twist,' an asset adjustment method involving selling short-term bonds and purchasing long-term bonds. Operation Twist was a fiscal policy implemented by the Fed in 2011 to overcome the U.S. economic recession, involving large-scale sales of short-term bonds and purchases of long-term bonds of the same scale. This can raise short-term interest rates while suppressing the rise in long-term rates.
The reason this measure is expected is that the rapid rise in long-term U.S. Treasury yields recently has raised inflation concerns, and with last week's U.S. stock market suffering losses and increasing market anxiety, the Fed is likely to respond accordingly.
Mark Cabana, a strategist at Bank of America, said, "The Twist policy is a way to stabilize bond yields and quell market inflation concerns," adding, "There is no more effective policy than this for the Fed."
Previously, at the FOMC meeting in November last year, the possibility of changing asset composition was also discussed. CNBC reported that "at that meeting, there was talk of adjusting the portfolio without increasing the Treasury's asset purchase scale."
In addition, an increase in the interest rate on excess reserves (IOER) is also expected to be a measure implemented by the Fed. Raising the IOER rate encourages commercial banks to hold more reserves at the Fed, which can affect key short-term rates, including the federal funds rate. It is also expected to help control the money supply appropriately and suppress inflation.
Joseph Brusuelas, senior economist at global accounting firm RSM, said in an interview with CNBC, "The Fed did not anticipate the recent excessive market anxiety about inflation," and analyzed that "additional measures such as Operation Twist and IOER rate adjustments by the Fed could be effective in calming market fears."
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