Fed vice chairman Janet Yellen even gave a speech in November where she uses a slide show to explain her view of what the “optimal path for monetary policy” would look like. The chart shows the Fed starting to raise rates at the start of 2016 and shows short-term interest rates crossing the 2 percent line in late 2017.
This chart, from a slide accompanying a speech by Fed vice-chair Janet Yellen in November, shows in blue her view of what an “optimal monetary policy” might look like.Now, Yellen’s chart could turn out to be wrong. Perhaps economic growth or inflation will take off before 2016, and the Fed will tighten policy earlier. Conversely, there could be a new recession, prompting an even longer wait before rates rise. Another uncertainty is that when Ben Bernanke’s term as Fed chairman ends less than a year from now, his replacement might push the Fed toward a different set of policies.But investors buying longer-term Treasury bonds know more than they ever did before about what Fed leaders themselves expect interest rate policy to be for the years ahead, and so the prices they pay reflect that. If bond prices fall (and yields rise) because the economy is doing a lot better, that’s a good thing overall, even if it means the value of bonds bought in 2012 fall in value.
(via Mark Thoma)
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