Surging Term Premium Complicates Fed's Fight Against Inflation
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The term premium, the extra yield investors demand for longer-term debt, has surged recently, fueling the rise in long-term rates.
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The Federal Reserve says the increase in the term premium could help tighten financial conditions and reduce the need for further rate hikes.
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However, the term premium is notoriously difficult to estimate and model, leading to uncertainty about its impact.
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The increase may be driven by rising deficits and debt supply rather than monetary policy expectations.
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If estimates of the term premium are inaccurate, the Fed may need more rate hikes than expected to restrain inflation.