The End of the Great Moderation: Forecasting in Elevated Uncertainty

Testifying to Congress in February 2005, then Federal Reserve Chair Alan Greenspan famously described the U.S. bond market as a “conundrum.” Although the Fed raised its policy rate at each meeting over the previous year, Chair Greenspan observed, the yield on the 10-year Treasury note was essentially unchanged—and the yield curve was flat as a pancake.

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Of course, when the leader of the world’s most important central bank scratches his head in public, many people get to work. One of those people was then Fed Governor Ben Bernanke. He delivered a speech soon after Greenspan’s testimony, arguing that low long-term bond yields were largely due to elevated global savings. This was especially true, Governor Bernanke noted, in fast-growing Asian economies, such as China, that were generating massive trade surpluses (denominated in dollars) and recycling those surpluses into the U.S. bond market as a store of value—under the expectation that the prevailing equilibrium of low growth, low inflation, and low interest rates would persist.

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