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short essays and reports on the economic issues of the day
2005 ■ Number 7

Twist and Shout, or Back to the Sixties
James B. Bullard
he Federal Open Market Committee (FOMC) has
increased the target federal funds rate at each meeting
since June 2004, to 2.5 percent following the February
2005 meeting. A puzzling aspect of recent financial market
developments has been that, despite the rise of 150 basis points
in the Fed’s target rate, longer-term rates have remained
roughly constant. In recent testimony, Fed Chairman Alan
Greenspan commented extensively on this issue, eventually
concluding that the market behavior “remains a conundrum.”1
There was a time when this same behavior would not have
been considered so unusual. It occurred in the early 1960s, a
cherished era among monetary economists and policymakers.
That era sported relatively rapid growth in both real output
and productivity, low inflation rates, and low rates of interest,
not unlike the present day. Although many years have passed
since that time, the intervening years have been associated
with higher inflation—at times substantially higher—and have
been dominated by Federal Reserve efforts to move inflation
lower and build credibility for continued low inflation. The
low level of inflation and high level of Fed credibility characteristic of the early 1960s returned in the early 2000s. Thus,
the early 1960s may give a better indication of the nature of
today’s financial markets than most of the intervening years.
The chart shows the evolution of short- and longer-term
interest rates during the 38 months following the last month
of the recession relevant to each era. The most recent recession ended in November 2001, while for the earlier era it
ended in February 1961. The chart shows the effective federal funds rate along with the longer-term 10-year Treasury
note yield. The most striking characteristic is that in both
eras, once the federal funds rate began rising following the
recession, the longer-term bond yield remained anchored
near 4 percent. One explanation is that, in both eras, the
private sector viewed movements in short-term interest
rates as exactly those necessary to keep inflation low and
steady, so that longer-term inflation expectations and hence
longer-term bond yields could remain anchored.
Similarities in the interest rate environment may also
be attributable in part to similarities in economic performance. The average annualized quarterly growth rates of key
variables were a lot alike during 2002:Q1 to 2004:Q4 as


compared with the corresponding 1961:Q2 to 1964:Q4 period.
Average nonfarm business sector productivity growth, for
instance, was almost identical during the two periods, 3.90
percent today versus 3.80 percent in the early 1960s. Inflation
rates were similar as well, with the core consumer price index
increasing, on average, 1.80 percent during the current period
versus 1.40 percent during the earlier era. Real output growth
was robust in both periods as well, 3.50 percent in the early
2000s versus 5.40 percent in the early 1960s.
The expansion of the 1960s was one of the longest on
record, lasting until December 1969, when a relatively mild
recession occurred. Inflation began to rise unexpectedly during
the last half of the 1960s, setting the stage for the economically
volatile decade to follow. Whether today’s FOMC will manage
a 1960s-style expansion remains to be seen, but the era may be
a good one to learn from given the similar levels of inflation
and Fed credibility. ■

Testimony of Chairman Alan Greenspan, Federal Reserve Board’s semiannual
Monetary Policy Report to the Congress Before the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, February 16, 2005.

Interest Rates, Then and Now
Basis Points
10-Year Treasury Yield, 2000s
10-Year Treasury Yield, 1960s
Effective Federal Funds Rate, Early 1960s

Nov 01/
Feb 61

Effective Federal Funds Rate, Early 2000s
Jun 02/
Sep 61

Jan 03/
Apr 62

Aug 03/
Nov 62

Months Since End of Recession, 1961 and 2001

Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Mar 04/
Jun 63

Oct 04/
Jan 64