Long-Term Interest Rates
Bernanke speech at San Francisco
Fed on March 1
In the News
• Context: concerns about investors increasing risk-taking
activities is leading some policymakers to want Fed to curtail
quantitative easing
• Bernanke’s goal: explain why continued monetary
accommodation is sensible
In the News
• Long-term interest rates have declined in many countries
(Chart 1)
In the News
• Why are long-term interest rates so low? (Chart 2)
– Low expected inflation
– Low expected future short-term interest rates
– Low term premium
• Theory of term structure of interest rates
In the News
• Long-term real interest rates are also low, not just nominal
rates (Chart 3)
– Based on inflation-indexed bonds
In the News
• How will long-term rates change in the future?
• Alternative forecasts (Chart 4)
• But much uncertainty about these forecasts
In the News
• What are the risks from higher interest rates?
– Investors reaching for yield, going long, will suffer capital losses
– What should the Fed do?
• Oversight of financial system, looking for systemic vulnerabilities
• Make sure banks have sufficient capital and liquidity to survive a sharp rise
in interest rates
• Mitigate the risk by not raising rates as quickly
– The Fed should NOT stop its accommodative policies because slowing
down the economy would worsen economy, making long rates low
longer