For a relatively brief period in ancient times, some four decades ago, U.S. financial markets traded freely with no overt central-bank interference. The market was permitted to set even the most basic interest rate—overnight federal funds—while the Federal Reserve under Paul Volcker aimed to control the money supply to vanquish double-digit inflation. Bond yields soared to records and the dollar turned higher, while stocks were at the end of a secular bear market in which the
Dow Jones Industrial Average
slid below the 1,000 level first reached back in the Swinging ’60s.
Fast-forward 40 years, and it’s tough to find a market the Fed doesn’t participate in. In response to the markets’ near meltdown from the coronavirus crisis, the central bank bought massive volumes of Treasury and agency mortgage-backed securities. Then it took the unprecedented step of also backstopping the corporate and municipal credit markets through measures including purchases of exchange-traded funds.
Further moves taken by other central banks reportedly also are under discussion, notably “yield curve control,” as the pegging of longer-term Treasury yields has been dubbed. Other formerly radical programs adopted by central banks abroad, such as the purchase of equities or the imposition of negative interest rates, are long shots.
“Price-fixing” is how Peter Fisher, who formerly ran the Fed’s Open Market desk, describes all these operations. Intervening in so many financial market sectors means that prices don’t mean what they once did.
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