4 Again, consider the U.S. experience of the late 1990s. When the FOMC tightened in 1999 and early 2000, the trajectory of stock prices actually steepened, and equity premiums fell--perhaps because investors became more confident that good macroeconomic performance would be sustained. Since mid-2004, we have seen a marked decline in bond-term premiums, even as the funds rate has risen steadily.
These episodes illustrate that risk premiums often move in mysterious ways, and we should not count on the ability of monetary policy to nudge them in the intended direction. Perhaps housing markets differ from equity and bond markets.