Re: moore on term structure

[Warren Mosler <mosler@xxxxxxxx>]

Basil Moore wrote:

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

Yes.

>         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??

It could have, for example, an overnight rate of 5% and a 10 year rate of 6%.Yes,
there would be arbitrage, but the risk is that the Fed could drop the
10 year 'peg' at anytime, or change it and/or change the short term rate.

Another option is that the Fed could 'announce' that its overnight target
would be fixed for 10 years.  The arbs would then keep the 10 year secs
in line.

Again, I am only showing some of the options the Fed has.


>

(snip)

>



> >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



--
Warren Mosler
Director of Economic Analysis
III Finance

http://www.warrenmosler.com