Greenspan's Conundrum

In the mid-2000s, the U.S. central bank tried to absorb market liquidity by raising the policy rate, but the market did not react. The Federal Reserve raised the policy rate by 3.75% over two years starting in 2004, yet the 10-year U.S. Treasury yield rose only 0.23%. Greenspan was baffled, saying it was an unexplained phenomenon, and it later became known as 'Greenspan's conundrum.' Afterwards, it was revealed that current-account surplus countries such as China had used their massive foreign exchange reserves to buy U.S. Treasuries, and the mystery was solved. In other words, although the U.S. policy rate rose, large-scale foreign capital inflows bought up the bonds, so bond prices soared and monetary policy was neutralized.

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Topics: Alan Greenspan
Category: Wiki/Economy
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