Should-Read: Tim Duy: Fed’s Bullard Knows His Treasury Yield Curve

Should-Read: I agree with Tim Duy here: Bullard is looking at the right things, and that is a very good sign…

Tim Duy: Fed’s Bullard Knows His Treasury Yield Curve: “Having tipped their toes in the water with two interest-rate hikes…

…the Federal Reserve… to date… have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter. I tend to be skeptical of that strategy, largely because it risks financial destabilization by flattening the yield curve…. I would prefer an explicit policy strategy that incorporates both interest-rate and balance-sheet tools acting jointly not with the goal of “normalizing” either of those components, but aimed at meeting the Fed’s dual mandates of full employment and stable prices. Under such a framework, for example, the Fed wouldn’t need to follow through with additional rate hikes before to balance-sheet reduction. There would be no preconceived notion of the “correct” order of operations. That’s why I like what I heard in St. Louis Federal Reserve President James Bullard’s most recent speech…. Bullard still sees the balance sheet as a mechanism to normalize policy even if policy rates remain low…. Bullard is building on Yellen by saying not only is that diminishment justification for a gradual pace of rate increases, but as a replacement for rate increases. There is nothing to stop them from initiating such policy now…