Accounting for the bond-yield conundrum
Long-term interest rates tend to rise as monetary policymakers increase short-term interest rates. This relationship didn't hold, however, during the recent U.S. monetary policy tightening cycle. Between June 2004 and June 2006, the Federal Open Market Committee increased the federal funds rate 17 times - going from 1 percent to 5.25 percent. Yet, long-term interest rates declined or stayed flat until early 2006. ; This divergence between short- and long-term interest rates caught many economists, investors and central bankers by surprise. In his Feb. 16, 2005, congressional testimony, former Federal Reserve Chairman Alan Greenspan characterized the behavior of long-term interest rates since June 2004: "For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience." ; Since then, this conundrum has prompted a great deal of discussion regarding both its magnitude and the factors behind it. However, a compelling and broadly accepted explanation has yet to be reached. ; The correct understanding and quantification of the conundrum have direct implications for monetary policy, which largely impacts economies as long-term interest rates respond to changes in central banks' target rates. Persistent changes in the relationship between short- and long-term interest rates will affect the timing and impact of monetary policy actions.
Volume (Year): 3 (2008)
Issue (Month): feb ()
|Contact details of provider:|| Web page: http://www.dallasfed.org/Email: |
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:feddel:y:2008:i:feb:n:v.3no.2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.