The Japanese yield cap is not an easy option for the Fed – former leader of the BOJ

By Leika Kihara and Sumio Ito

TOKYO (Reuters) – Setting an explicit ceiling on long-term interest rates, similar to that adopted by the Bank of Japan, will not be an easy option for the US Federal Reserve, given the uncertainty surrounding its impact on inflation expectations. BOJ executive says.

the BOJ is now adopting a policy called Performance Curve Control (YCC) that combines a negative short-term interest rate target with an effective zero per cent ceiling on 10-year government bond yields.

In the face of slowing growth and the lack of tools to face the next recession, several Fed officials have launched the idea of ​​targeting longer-term rates while BOJ done now.

"By capping long-term rates, central banks risk undermining inflation expectations, not increasing them," Kazuo Momma, chief executive officer, said. BOJFormer Executive Director who oversaw changes to the monetary and international policy stages.

He said keeping long-term rates low for a prolonged period might stir up the impression that inflation would not increase much.

Therefore, setting a yield cap will not be an easy option for the Fed because of uncertainty about its effect on inflation expectations, Momma told Reuters on Friday.

"Even if it adopts one, the Fed will probably set a more manageable ceiling for the shortest part of the yield curve," said Momma, now chief economist of the private think tank Mizuho Research Institute.

After years of heavy printing, "central banks no longer have any magic hands," he said, adding that budget spending would be more important to fight the next economic downturn.

Among the main central banks, the BOJ Momma said that there were as few options as possible, as years of radical stimulus failed to meet its 2% inflation target.

If the economy collapses again, the BOJ can take minor steps, such as changing its forecasts, or a central bank commitment to policy, he said.

In a prospective directive adopted in April, the BOJ said he would keep current rates at extremely low levels until at least the spring of 2020.

"The BOJ could strengthen the forecast by bringing it closer to inflation, "said Momma.

"For example, he could pledge not to raise his rates as long as the risks of deflation are no longer eradicated."

(Report by Leika Kihara, edited by Shri Navaratnam)