Conundrum? What conundrum?

William Poole of the St. Louis Fed doesn't see a conundrum. Read the whole speech here.

The fact that the 10-year bond has not exhibited a persistent trend over the past 18 months or so while the Fed has been increasing the target fed funds rate by 200 basis points is not evidence that something is awry with monetary policy. Think of the issue this way. At the beginning of a planning period the Fed has in mind a probable course for the economy and expectations about the policy adjustments that will be consistent with long-run policy objectives. Suppose the market has the same understanding as the Fed. Suppose also that events turn out largely as expected. Then, everything goes according to plan, including policy adjustments and the course of bond rates. In fact, in January 2004 the Eurodollar futures contract for June 2005 traded at an average rate of 2.81 percent, which was not far off the target fed funds rate of 3.0 percent set by the FOMC on May 3, 2004.

I am not claiming that the Fed had a firm plan in mind in January 2004 to reach a target fed funds rate of 3 percent in May 2005, but rather that events have simply worked out that way, corresponding rather closely to the market’s best guess as to how events would unfold. In any event, the fact that everything goes about as expected is certainly not evidence of a policy problem.

I would be delighted, as would professional forecasters, for the string of accurate forecasts to continue. But we would be well advised not to forget those forecast standard errors. They have not vanished. With respect to forecast errors, the future is more likely to be like the past several decades than like the past year. If real growth and/or inflation depart significantly from current expectations, then we will see a persistent trend in the bond rate. I hope we do not see such an outcome, for I believe that the current outlook for the economy is quite favorable. I hope that current expectations are realized.

Poole doesn't use the term "soft landing." It's not much of a stretch to think of his observations in those terms though. The bond market seems to have a lot of confidence in the Fed's ability to engineer a soft landing--confidence that, so far at least, has been well-placed. But the final chapter of this episode has not yet been written.