Paul Kasriel argued that higher market rates without a meaningful Fed move amount to easier, not tighter, monetary policy, directly challenging Chairman Kevin Warsh’s July 29 interpretation.
From May 22 to July 31, the 10-year Treasury yield rose 11 basis points and the 2-year rose 15 basis points, while the effective federal funds rate increased just 1 basis point, steepening the curve versus policy rates.
Kasriel said that wider spreads between long-term yields and the fed funds rate have historically preceded faster real activity and stronger bank lending, citing research later incorporated into the Conference Board’s leading indicators.
His mechanism is that when long yields rise while the Fed holds short rates steady, banks’ incentive to extend credit improves, making the recent rate move inconsistent with Warsh’s claim that markets tightened policy for the Fed.