Fed’s Clarida Leaves Door Open to Yield Caps Under New Framework

Federal Reserve Vice Chair Richard Clarida left open the possibility of employing Treasury yield caps at some point in the future, though he indicated it’s not likely now and reiterated the central bank’s rejection of negative interest rates.

“Yield caps and targets were not warranted in the current environment but should remain an option that the committee could reassess in the future if circumstances changed markedly,” Clarida said in the text of remarks Monday for an online event hosted by the Peterson Institute for International Economics.

Clarida also said policy makers might offer “refinements” to their Summary of Economic Projections — a quarterly document that outlines their economic outlook and projections for rates — in light of the framework changes announced last week by Fed Chair Jerome Powell.

“Now that we have ratified our new statement, the committee can assess possible refinements to our SEP with the aim of reaching a decision on any potential changes by the end of this year,” he said.

Clarida’s remarks follow Powell’sannouncement that the U.S. central bank will sometimes allow inflation to run above its 2% objective to make up for prior undershoots, and allow unemployment to run lower than officials had previously tolerated. The shift is aimed at boosting inflation after years of falling short of the Fed’s target, an outcome that hurts the central bank’s ability to fight recessions.

Fed policy makers next meet Sept. 15-16, when they’ll have a chance to spell out how the new long-term strategy will shape their near-term policies aimed at pulling the U.S. economy out of its sharpest downturn since the Great Depression. Central bankers will also release their latest Summary of Economic Projections.

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