Premium
Greenspan's Conundrum and the Fed's Ability to Affect Long‐Term Yields
Author(s) -
THORNTON DANIEL L.
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12469
Subject(s) - treasury , federal funds , yield (engineering) , economics , monetary economics , affect (linguistics) , monetary policy , basis point , point (geometry) , variety (cybernetics) , keynesian economics , yield curve , term (time) , quantitative easing , interest rate , economic history , central bank , political science , philosophy , law , mathematics , materials science , geometry , physics , quantum mechanics , metallurgy , linguistics , statistics
In February 2005 Federal Reserve Chairman Alan Greenspan noticed that the 10‐year Treasury yields failed to increase despite a 150‐basis‐point increase in the federal funds rate and called it a “conundrum.” This paper investigates the historical relationship between the 10‐year Treasury yield and the federal funds rate and finds that the relationship changed dramatically in the late 1980s, well in advance of Greenspan's observation. The paper evaluates three competing hypotheses for the change. The evidence from a variety of sources supports the conclusion that the most plausible explanation is that the change occurred because the FOMC began using the federal funds rate as a policy instrument.