If interest rates are the measure of monetary policy, then we have already seen a strong tightening.
For example, since late March, the yield on the 10-year Treasury note — a critical interest rate since it’s the basis for mortgage rates — has jumped a full percentage point.
That sentence appears right next to a chart showing that the Federal Reserve has kept its interest rate unchanged for the past year. The job of monetary tightening is being undertaken instead by what Wall Street economist Edward Yardeni calls “bond market vigilantes.”
This is hardly the first time that the market has changed monetary policy ahead of the Fed. The central bank had fallen behind a loosening trend back when I wrote Can Greenspan Steer?
For Discussion. What factors account for the rise in long-term interest rates?
READER COMMENTS
Mcwop
May 28 2004 at 8:30am
I don’t buy the “vigilante” theory. The bond market is simply discounting the obvious: the Fed will raise interest rates soon. The Fed knows that they cannot keep negative real short-term rates forever – the bond market knows this too.
MB
May 28 2004 at 9:11am
Higher expected inflation, anyone?
Lawrance George Lux
May 28 2004 at 4:47pm
Would you accept the proposition that financial funds are a market product dependent upon the level of Profits enjoyed by Business, with foreign investment and Government deficit spending drawing down heavily upon those profits. One must remember these fund catagories are not like any Central bank, they are made by private investers who must have the excess cash. These funds deminish, and fund markets must offer higher interest rates to capture what excess funds remain. lgl
alan kral
May 31 2004 at 10:38am
The Fed is behind curve,deliberately.It’s downplaying its inflation responsibilities in favor of economic stimulus and will not change direction while there is any chance a course correction interferes with the election.This means it will lose credibility when it finally does move which could lead to a replay of 1994. Rates are going up–a lot.
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