Authored by Shahid Islam via RealClearMarkets,
Financial commentary often makes monetary policy sound mechanical. The Federal Reserve raises interest rates, borrowing costs rise. The Fed cuts rates, borrowing costs fall.
History is considerably messier.
Beginning in June 2004, the Federal Reserve raised its federal-funds target 17 consecutive times, taking it from 1 percent to 5.25 percent.
What happened to the 10-year Treasury yield?
It averaged 4.73 percent in June 2004. By February 2007, after the Fed had raised its target by 4.25 percentage points, the 10-year yield averaged 4.72 percent.
Fed funds: 1.00% → 5.25%
10-year Treasury: 4.73% → 4.72%
Alan Greenspan famously called the unusual behavior of long-term interest rates a "conundrum." Federal Reserve researchers subsequently examined the episode and found that during the tightening cycle, long-maturity yields and forward rates actually fell for significant periods even as the Fed repeatedly raised its target.
Yet public discussion routinely compresses this complicated process into a simple phrase: "The Fed raised interest rates."
The distinction matters well beyond monetary history. Investors, homeowners and businesses care less about the overnight rate itself than about the market rates at which they actually borrow and invest. Mortgage rates can rise after a Fed cut or fal
