“In addition, the Fed’s estimates show that the term premium on a 10‐year bond, which reflects the part of the bond yield that cannot be explained by anticipations over short-term rates, is already negative, and an additional drop would be surprising,” says the report.
Monetary policy outlook
To assess the future of monetary policy, the report discusses the theoretical concept of the neutral rate, defined as the rate that maintains an economy operating at its full capacity, as well as maintains inflation at the level targeted by the central bank once cyclical influences have dissipated.
The neutral rate thus indicates when central banks should end monetary tightening.
While there’s uncertainty surrounding the exact value of neutral rates, “the weight of evidence suggests that they are at least 2.5% in nominal terms,” says the report.
At that value, assuming economic growth and inflation both rise as expected, the Fed and BoC can “continue to gradually raise their key rates in the coming quarters without worrying about implementing a contractionary monetary policy.”
That means “a significant increase in long‐term bond yields in the next few quarters.”
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Published at Wed, 13 Sep 2017 13:15:57 -0400