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The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law?

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  • Daniel L. Thornton

Abstract

In February 2005, former Chairman Alan Greenspan referred to the decline in long-term rates in the wake of the Fed increasing the target for the federal funds rate by 150 basis points as a ?conundrum.? Greenspan?s remarks generated considerable interest and research. I show that the relationship between the 10 year Treasury yield and the federal funds rate changed dramatically in the late 1980s, well in advance of Greenspan?s observation. I argue that the marked change in the relationship between the federal funds rate and long-term yields is a natural consequence of Goodhart?s Law.

Suggested Citation

  • Daniel L. Thornton, 2008. "The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law?," Working Papers 2007-039, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2007-039
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    Cited by:

    1. Daniel L. Thornton, 2014. "The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 67-87, January.
    2. Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    3. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.

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    Federal funds market (United States); Government securities;

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