Cracking the Conundrum

David Backus and Jonathan Wright

Brookings Papers on Economic Activity, 2007, vol. 38, issue 1, 293-329

Abstract: From 2004 to 2006 the Federal Open Market Committee raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this conundrum of rising short-term and falling long-term interest rates. The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.

Keywords: macroeconomics; Federal funds rate; interest rates; financial market volatility (search for similar items in EconPapers)
JEL-codes: E43 E52 G12 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (76)

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Working Paper: Cracking the conundrum (2007)
Working Paper: Cracking the Conundrum (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:293-329

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