Cracking the Conundrum

36 Pages Posted: 18 Sep 2007 Last revised: 3 Mar 2021

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: September 2007


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.

Suggested Citation

Backus, David K. and Wright, Jonathan H., Cracking the Conundrum (September 2007). NBER Working Paper No. w13419, Available at SSRN:

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Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

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