Re: moore on term structure

[Basil Moore <bmoore@xxxxxxxxxxxx>]

Warren

        You have said before that in your opinion the Fed could if it wished
control a long rate, e.g. Treas.10 yr.

        My problem with this is that controlling the 10 yr rate implies it
must also control all shorter term rates at the same level, in order to
satisfy the expectations theory?? Otherwise, if the market did not believe
the average short rates over the next 10 years, would equal the long rate
seet by the Fed, it could arbitrage indefinitely???.

        Perhaps otherwise expressed, there would seem to be strong limits
over which the CB could set the LT rate, which does not apply to its target
of the ST rate??

        Basil



At 09:14 AM 10/10/97 -0400, you wrote:
>Doug Henwood wrote:
>>
>> Michael Perelman wrote:
>>
>> >Is Doug saying the the fed cannot influence long term rates?
>>
>> Heavens no. As the astrology columns used to say, with long rates, the Fed
>> can impel, but it can't compel. Or as Jim Grant once said, it can play an
>> engaging tune, but it can't make people dance. The fed can (strongly)
>> influence long rates, but not set with the precision that it can set the
>> funds rate - the bond traders have the last word.
>>
>> Doug
>
>Doug,
>
>Of course, this is by choice.  It does have the option, for
>example, to 'make a market' in the 10 year Tsy, or, better
>still, the 10 year swap.  There is no way the market could
>trade 'through' the Fed's bid and offer.  However, as with
>current policy with overnight rates, there could be 'consequences,'
>etc., that would result in the Fed voting to change its rate
>target/policy.
>
>Greece, for example, sets the one year bill rate exogenously,
>and has been doing so for some time.
>
>Warren
>--
>Warren B. Mosler
>Director of Economic Analysis
>III Finance
>
>See:
>
>"Soft Currency Economics"
>"Full Employment AND Price Stability"
>=========================
>And related documents:
>
>http://www.warrenmosler.com
>
>


Basil Moore, Department of Economics
Wesleyan University
685-2363