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Cracking the Conundrum

David K. Backus
Leonard N. Stern School of Business - Department of Economics

Jonathan H. Wright
Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

September 2007

NBER Working Paper No. W13419

Abstract:
From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this conundrum. 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.

JEL Classifications: E43, E52, G12

Working Paper Series

Date posted: September 18, 2007 ; Last revised: November 29, 2007

Suggested Citation

Backus, David K. and Wright, Jonathan H., Cracking the Conundrum (September 2007). NBER Working Paper No. W13419. Available at SSRN: http://ssrn.com/abstract=1014796

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Contact Information

David K. Backus (Contact Author) Leonard N. Stern School of Business - Department of Economics ( email ) 44 West Fourth Street, 7-180 New York, NY 10012 United States 212-998-0873 (Phone) 212-995-4220 (Fax)
Jonathan H. Wright Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email ) 20th St. and Constitution Ave. Washington, DC 20551 United States 202-453-3696 (Phone) 202-263-4843 (Fax)