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According to the president of the Federal Reserve Bank of San Francisco, Janet Yellen the increase in the interest rates this week has not gone to far clearing what the rormer Federal Reserve Chief Alan Greenspan coined as “the bond rate conundrum. She also said that the long term rates has risen this week but to near enough to resolve “Greenspan’s conundrum. This was her brief remarks in the global economic outlook of Brandeis University. She refers to long term interest rates peculiar behavior that barely move in the Fed’s long raise short term rates ranging from 1.25% to 5.25% during the 2 years interval that ends at 2006. This comments from her seems to suggest that she is not worried that the rise of interest rates will derail the economy as the homeowners and businesses force to pay high credit cost. The level of long term rats is one of the indications that risk premiums are noted to be low in United States and internationally. The other domestic signs of this is seen in "the very low options-based implied volatilities" in most types of financial instruments of US such as the equities, debt instruments, and exchange rates. She said with concern that the current benign trade environment with relatively low interest rates and equity markets can change suddenly that will lead to large loss and decline in the prices of assets. The Fed cannot perceived the asset bubbles because of the exceptional difficulty in distinguishing market extra’s from the fundamental based booms. According to Yellen “I therefore believe that central banks should stand ready to act to cushion the economy in response to shocks when and if they occur”
07:34
Posted on Jun-18-2007
