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LONGER-TERM PERSPECTIVES ON THE YIELD CURVE In contrast to “conventional wisdom,” long-term interest rates did not rise as the Federal Reserve raised the federal funds rate target in a series of moves starting in the spring of 2004. Federal Reserve Chairman Alan Greenspan called the behavior of long-term rates a “conundrum,” and considerable effort has been made to understand the causes of the conundrum and its implications for monetary policy. In “Longer-Term Perspectives on the Yield Curve and Monetary Policy,” Sharon Kozicki, vice president and economist at the Federal Reserve Bank of Kansas City, and Gordon Sellon, vice president and economist at the Bank, provide a framework for understanding the relationship between monetary policy and the yield curve that can be used to analyze the behavior of long-term rates during periods of monetary policy tightening. The article is featured in the fourth quarter edition of the Economic Review. The authors use the framework to examine two recent episodes of policy tightening in 1999-2000 and 2004-05. The analysis reveals that the recent decline in long-term rates can be attributed partly to a decline in the inflation risk premium and partly to a decline in the term premium. In 1999-2000, in contrast, long-term rates rose as policy was tightened because a large increase in market expectations of the neutral or equilibrium federal funds rate more than offset a fall in the term premium. The analysis in the article also has broader implications for thinking about the yield curve and monetary policy and provides some insight for how the yield curve might behave going forward. The article is available on the Bank’s Web site at www.kansascityfed.org. ### Return to
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