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May 27, 2004

Bond Market Vigilantes

Arnold Kling

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?


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CATEGORIES: Monetary Policy (19)


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Mcwop writes:

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.

Posted May 28, 2004 08:30 AM

MB writes:

Higher expected inflation, anyone?

Posted May 28, 2004 09:11 AM

Lawrance George Lux writes:

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

Posted May 28, 2004 04:47 PM

alan kral writes:

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.

Posted May 31, 2004 10:38 AM
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