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Comment and Discussion

Glenn D. Rudebusch: This paper by David Backus and Jonathan Wright examines a timely topic of interest to macroeconomists, financial econo mists, and the general public of long-term savers and investors. They investigate the recent episode of continuing low long-term interest rates? a behavior that appears to some to be a "conundrum" given that short-term rates worldwide have been rising. For example, in the United States, while the Federal Reserve raised the federal funds rate from 1 percent in June 2004 to 514 percent in December 2006, the rate on ten-year U.S. Treasury notes actually edged down, on balance, from 4.7 percent to 4.6 percent. This directional divergence between shortand long-term rates is at odds with historical precedent and appears even more unusual given other eco nomic developments at the time, such as a solid economic expansion, a falling unemployment rate, rising energy prices, and a deteriorating federal fiscal situation, all of which have been associated in the past with higher long-term interest rates rather than lower. Of course, determining whether recent long-term interest rate move ments truly represent a puzzle requires a theoretical framework that takes into account the various factors that affect long-term rates. The paper takes a joint macro-finance perspective on this problem, which, as much recent research suggests,1 is a promising strategy that can capture two broad sets of determinants of long-term rates. In particular, from a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank, which adjusts that rate to achieve its macroeconomic stabilization goals. Therefore financial market partici pants' understanding of central bank behavior, along with their views of