The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law?

Daniel Thornton ()

No 2007-039, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In February 2005, former Chairman Alan Greenspan referred to the decline in long-term rates in the wake of the Fed increasing the target for the federal funds rate by 150 basis points as a “conundrum.” Greenspan’s remarks generated considerable interest and research. I show that the relationship between the 10 year Treasury yield and the federal funds rate changed dramatically in the late 1980s, well in advance of Greenspan’s observation. I argue that the marked change in the relationship between the federal funds rate and long-term yields is a natural consequence of Goodhart’s Law.

Keywords: Federal funds market (United States); Government securities (search for similar items in EconPapers)
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Date: 2008
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