Yet between mid-July and mid-October it went on a tear. Over the span the measure surged more than 1.3 percentage points, flipping to positive for the first time since 2021. 

Another popular gauge created by the Fed’s Don Kim and Jonathan Wright shows the metric rising by a more modest, yet still significant, 75 basis points over the span. While both measures have come in between 20 and 35 basis points from their late October peaks, they remain well in positive territory.

Tough to Measure
Powell has said that anything from a heightened focus on fiscal deficits to the central bank’s own quantitative tightening may be behind the term premium’s rise.

Others aren’t so sure.

Term premium models use an estimate for the Fed’s long-run neutral policy rate to then derive how much of current market yields are the result of the abstract measure.

“The thing that makes it hard to model the term premium is that God doesn’t tell you what the expected path that short rates are going to be over the next 10 years,” said Former Fed Governor Jeremy Stein, who’s now an economics professor at Harvard University. He’s warned that estimates for the neutral policy rate may be overly influenced by near-term expectations, resulting in term premium measures that are too high.

If he’s right, the Fed may be overestimating how lasting the recent run-up in yields will be, and how much it will help put the breaks on the economy and inflation.

In fact, the rate on the 10-year Treasury has fallen more than 30 basis points since Powell hinted at his post-Fed meeting press conference last week that the central bank may have reached the end of the current tightening cycle.

“The notion that higher long-term interest rates can substitute for additional monetary tightening depends critically upon why long-term rates have increased,” Bill Dudley, a Bloomberg Opinion contributor and former president of the New York Fed, wrote in a column last week. If term premium measures are accurate, it would justify keeping interest rates steady, he said.

If they’re not, however, “higher short-term rates would be needed to exert the same degree of restraint.”