Cracking the Conundrum
37 Pages Posted: 29 Nov 2007
Date Written: October 1, 2007
From 2004 to 2006, the FOMC 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." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle.
Keywords: Yield curve, forward rates, volatility, term premium, affine models, monetary policy
JEL Classification: E43, E52, G12
Suggested Citation: Suggested Citation