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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Cracking the conundrum
David K. Backus
Jonathan H. Wright
Abstract

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.


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David K. Backus & Jonathan H. Wright, Cracking the conundrum, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2007-46, 2007.
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Keywords: Monetary policy ; Interest rates
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