Interest Rate Conundrum

Roger Craine and Vance Martin

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: In June of 2004 the Fed began relentlessly tightening policy. They raised the Federal Funds Target (Target) from 1% to 5 1/4% in 1/4% increments at seventeen consecutive meetings. While short rates dutifully followed the Target up, long maturity rates actually fell. Alan Greenspan in 2005 Congressional testimony labeled the strange behavior of the spread between long rates and the Target a “conundrum”. This paper examines the conundrum. We present robust empirical evidence that the increase in foreign holdings of US Treasury bonds explains at least half of the decline in long maturity rates. Foreign holdings of US Treasury debt with a maturity over one year grew from 20% in 1994 to 57% in 2007.

Keywords: Forward Rates; Money and Macroeconomic surprises; Foreign Demand for US Treasury Bonds; Social and Behavioral Sciences; Other Economics (search for similar items in EconPapers)
Date: 2009-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Journal Article: Interest Rate Conundrum (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:cdl:econwp:qt0409193t

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