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The Brookings explaining the yield cure control writes:

Interest rate pegs theoretically should affect financial conditions and the economy in many of the same ways as traditional monetary policy: lower interest rates on Treasury securities would feed through to lower interest rates on mortgages, car loans, and corporate debt, as well as higher stock prices and a cheaper dollar.

My question is, how would the lower price of Treasury securities transfer lower interest rates on mortgages, car loans and etc? Can anyone explain the mechanics of that?

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  • $\begingroup$ economics.stackexchange.com would be a better fit for this question. $\endgroup$ Mar 11, 2021 at 18:49
  • $\begingroup$ "how would the lower price of Treasury securities transfer lower interest rates on mortgages, car loans and etc? Can anyone explain the mechanics of that?" - because credit risky interest rates are based on a (credit) risk-free rate ("RFR") plus a spread. Lower RFR and unchanged spreads means lower rates on credit risky debt such as mortgages and auto loans. $\endgroup$
    – user42108
    Mar 11, 2021 at 20:04

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Very short answer... The central bank cuts rates, and assumes that this should then make banks more willing to lend, which finances more of those car/student/credit-card loans etc. Except when it doesn't, the central bank worries about the economy being caught in a "liquidity trap". That's the economics done - read Keynes's General Theory for more on that aspect to this.

The essence of the problem is that if the central bank offers the commercial banks a trillion of free capital and they won't lend, then offering them another free trillion doesn't solve the problem. In the argot, this is "monetary policy pushing on a string". So the central bank has to go further and fix the price of longer-term money. Which is the essence of "Yield CurVe Control" (YCC).

Essentially, they rig the price of 10 year government debt to lower the yields, by printing to hoover it all up themselves. And then the same credit spread will cheapen the debt for all private-sector borrowers.

So before 10y govt rates were say 3%, and a loan cost 2% more equals 5%. If the central bank buys enough bonds to fix the price of the same govt bond at 0%, then the same loan at the same spread now costs the same student/auto-buyer 2% instead of 5%. At 2% rather than 5%, there is a lower risk that the borrower cannot repay, so why would the bank not start lending???

This, somewhat simplified, is the essence of the argument.

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