Central banks: Speech is silver, but action is golden

The sharp rise of yields in the past few weeks now also has the attention of the central banks. Some governors of the US Federal Reserve and the European Central Bank have commented on this development, with one aspect clearly in focus. Both central banks have emphasized that they intend to keep policy interest rates at current levels for a long period despite the emerging economic recovery and expectation of temporarily rising inflation rates. However, central bank attempts to communicate have not impressed the bond market. 

What options do the central banks have to rein in this rise of interest rates and yields, which is undesirable from their perspective? The Fed could increase the volume of its asset purchases, as it already has in the past two weeks. Another possibility would be for the central bank to change the maturity structure of its bond holdings. Such an "Operation Twist," in which short-dated bonds are sold, and long-dated bought, was last adopted in September 2011. The ECB has similar options as the Fed. It is now actually fighting on two fronts that are making financing conditions for businesses worse: higher yields and a stronger euro. We think the ECB should soon substitute action for words to keep the yield upsurge from choking off fragile growth.