By Matthew Kerkhoff
On February 17, 2005, Federal Reserve Chairman Alan Greenspan testified before the Senate Committee on Banking, Housing, and Urban Affairs. He noted that despite a recent 150 basis point increase in the federal funds rate, long-term rates had actually trended lower.
Rejecting a variety of explanations at the time, Greenspan called this a “conundrum.”
In his experience, movements in short-term rates typically coincided with similar magnitude and direction movements in longer term rates. He described the theory behind this as follows: