Longer-term perspectives on the yield curve and monetary policy.

Economic Review (Kansas City), September, 2005 by Kozicki, Sharon; Sellon, Gordon

In the spring of 2004, there was widespread expectation in financial markets that the Federal Reserve would shortly begin the process of raising its federal funds rate target back toward a more normal level. At the time, there was considerable concern that removing policy accommodation could lead to a sharp rise in long-term interest rates that might roll financial markets or slow the economic recovery. Much of this concern was based on the sizable increases in long-term rates that occurred when the Federal Reserve tightened policy in 1994-95 and 1999-2000.

In contrast to the conventional wisdom, however, longer-term rates actually declined as the funds rate target rose. Indeed, in August 2005, after the Federal Reserve had raised its federal funds rate...

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