Fed: QE supported in a severe downturn situation – Deutsche Bank

Deutsche Bank analysts note that possibly supporting the bull steepening move were comments from Fed Governor Brainard yesterday, who explicitly said that she supports a form of yield curve control targeted at the front end of the yield curve.

Key Quotes

“Her proposal would cap front-end Treasury yields to reinforce forward guidance and ideally drive down longer-end rates as a result. She says that this policy would be better than outright QE, though she did say that she would support QE in a severe downturn.”

“Brainard also committed to supporting a flexible inflation target, to “anchor inflation expectations at 2 per cent by achieving inflation outcomes that average 2 per cent over time or over the cycle.” Such a change in the Fed’s target appears increasingly likely as a result of their ongoing policy review.”

“Earlier in the day, Dallas Fed President Kaplan said that “I think policy is in the right place now”, but also said that “We think the fourth quarter is going to be weak”. Kaplan is going to be a voting member on the FOMC next year. He expects growth around 2% for 2020, and would likely need to see a downside surprise versus that figure before supporting any change in policy.”