Greenspan’s conundrum and the Fed’s ability to affect long-term yields
AbstractIn February 2005 Federal Reserve Chairman Alan Greenspan noticed that the 10-year Treasury yields failed to increase despite a 150-basis-point increase in the federal funds rate as a “conundrum.” This paper shows that the connection between the 10-year yield and the federal funds rate was severed in the late 1980s, well in advance of Greenspan’s observation. The paper hypothesize that the change occurred because the Federal Open Market Committee switched from using the federal funds rate as an operating instrument to using it to implement monetary policy and presents evidence from a variety of sources supporting the hypothesis. The analysis has implications for central banks’ interest rate policies.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-036.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-MAC-2012-10-06 (Macroeconomics)
- NEP-MON-2012-10-06 (Monetary Economics)
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