Long Bond Yields and the Fed

The chart below displays yields on the 10 year T-note over the past 200+ years.

If we were to calculate the standard deviation of interest rates for the first half of the series, and then do the same for the second half, which standard deviation would be higher?

Answer: the second half by a mile. Long bond rates have been significantly more volatile during the past 100 years than during the previous 100.

A key difference between the two periods is the presence of the Federal Reserve. The Fed came into being in 1913, and has been getting progressively more intrusive in markets since then.

Ironically, a primary justification for the Fed was that a central bank was needed to stabilize economies and markets that purportedly were too volatile in their free unregulated states.

The interest rate data above suggest just the opposite. The Fed's presence increases, rather than decreases, volatility in credit markets which, because of credit's centrality to economic activity, spills instability into the entire economic and financial system.

Stated differently, credit markets unhampered by central bank regulation are likely to be more stable, rather than less, stable. How can that not be a boon for economic activity?

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