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Understanding Long-Term Interest Rates: Bernanke's Speech Insights

Explore Bernanke's explanation on why continued monetary accommodation is sensible amid declining long-term interest rates globally, including the factors influencing these rates and the potential risks and strategies associated with them.

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Understanding Long-Term Interest Rates: Bernanke's Speech Insights

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  1. Long-Term Interest Rates Bernanke speech at San Francisco Fed on March 1

  2. 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

  3. In the News • Long-term interest rates have declined in many countries (Chart 1)

  4. 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

  5. In the News • Long-term real interest rates are also low, not just nominal rates (Chart 3) • Based on inflation-indexed bonds

  6. In the News • How will long-term rates change in the future? • Alternative forecasts (Chart 4) • But much uncertainty about these forecasts

  7. 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

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