COMBATTING THE CONUNDRUM

In 2005, Alan Greenspan, chairman of the Federal Reserve, used the term “conundrum” to describe the flattening of the yield curve in response to Fed tightening. At the time, the Federal Reserve had already raised the Fed Funds rate 150 bps, while ten and thirty-year yields remained stubbornly stable. History has shown that short and longer-term rates have rarely moved in a parallel fashion, and it is difficult to accept that Greenspan believed they would. A more likely motivation for Greenspan’s explanation is that he did not want to admit publicly what was truly happening—that rate hikes were curbing future growth and inflation.