by Jeffrey P. Snider
Alhambra Partners
Last April, former Fed Chairman Ben Bernanke wrote a series of blog posts for Brookings that was intended to explain one of the biggest contradictions of his legacy. If quantitative easing had actually worked as he to this day suggests that it did, why wasn’t the bond market in clear agreement? In order to try to reconcile the huge discrepancy, Bernanke offered several possibilities, even titling his effort “Why Are Interest Rates So Low?” to further emphasize the difficulty.
The fourth part of his series treated with “term premiums”, an element of Fisherian rate decomposition that economists use to try to understand bondholders and their motivations. In many ways, however, “term premiums” are a plugline, a leftover after considering the other perhaps more visible (this is a relative designation, as we always need to keep in mind that nothing presented here or that is discussed in policy or mainstream circles about these ideas is visible) parts of rate decomposition – expected path of real short-term interest rates and inflation compensation.