Bernanke_yield_curve_speech - FRB: Speech,...

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Remarks by Chairman Ben S. Bernanke Before the Economic Club of New York, New York, New York March 20, 2006 Reflections on the Yield Curve and Monetary Policy I would like to thank the Economic Club of New York for inviting me to speak here this evening. I intend to take the opportunity afforded by an audience of experts on global financial markets to address an intriguing financial phenomenon: the fact that, over the past seven quarters or so, tightening monetary policy has been accompanied by long-term yields that have moved only a little on net. Why have long-term interest rates not risen more, as they have done over previous policy tightening cycles? And what implications does this pattern of long-term interest rates have for monetary policy and the economic outlook? As you will see, in my remarks I will do a better job of raising questions than of answering them. In particular, I will conclude that the implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut. I hope you will agree that these questions are nevertheless worthwhile posing, as they are intertwined with a number of important economic and financial issues. I should say at the outset that the views I will express are my own and are not necessarily shared by my colleagues on the Federal Open Market Committee (FOMC). The Federal Reserve's Tightening Cycle The tightening cycle that began at the end of June 2004 is notable in at least four respects. First, its onset was delayed for longer than many observers expected. The FOMC kept policy unusually accommodative for an extended, or should I say for a considerable, period. The goal, as you know, was to help ensure that the economic expansion would be self- sustaining and to protect against a remote risk that the fall in inflation observed during 2003 might culminate in outright deflation--an outcome that could have had potentially serious consequences for the economy and for the efficacy of monetary policy. Indeed, with those concerns in mind, in 2003 the Federal Reserve made explicit for the first time that price stability is a symmetric objective: It is important to avoid inflation that is too low as well as inflation that is too high. A second way in which the most recent experience has been unusual is the extent to which policy actions have been signaled in advance. Both in the months leading up to the initiation of the tightening cycle and during the cycle itself, the statements issued after each meeting of the FOMC provided qualitative guidance about the likely future path of policy and its dependence on economic events. Providing information about the expected path of policy helped to ensure that long-term interest rates and other asset prices did not build in a projected pace of tightening that was more rapid than the Committee itself anticipated, and the statement's focus on the conditionality of future policy actions emphasized the ongoing need for both policymakers and financial market participants to respond to economic news. In retrospect, the clear communication of policy provided notable benefits, in my view, by
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This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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Bernanke_yield_curve_speech - FRB: Speech,...

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