36 Pages Posted: 18 Sep 2007
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: Suggested Citation
Backus, David K. and Wright, Jonathan H., Cracking the Conundrum (September 2007). NBER Working Paper No. w13419. Available at SSRN: https://ssrn.com/abstract=1014796