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The relationship between the federal funds rate and the Fed's federal funds rate target: is it open market or open mouth operations?

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  • Daniel L. Thornton

Abstract

It is widely believed that the Fed controls the funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the federal funds rate. Recently, however, several economists have suggested that open market operations may not be necessary for controlling the funds rate. Rather, they suggest that the Fed controls the funds rate through open mouth operations. The Fed merely indicates its desire to change the funds rate and the market does the rest. This paper investigates the extent to which the close relationship between the federal funds rate and the federal funds rate target is due to open market or open mouth operations. Finding little evidence to support either the open market or open-mouth hypothesis, the possibility that many target changes represent the endogenous actions of the Fed real shocks and inflation surprises is briefly considered.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1999-022.

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Date of creation: 2000
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Publication status: Published in Journal of Banking and Finance, March 2004, 28, pp.475-98.
Handle: RePEc:fip:fedlwp:1999-022

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Keywords: Federal funds rate ; Monetary policy ; Open market operations;

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Cited by:
  1. Cysne, Rubens Penha, 2005. "What Happens After the Central Bank of Brazil Increases the Target Interbank Rate by 1%?," Economics Working Papers (Ensaios Economicos da EPGE) 584, FGV/EPGE Escola Brasileira de Economia e Finan├žas, Getulio Vargas Foundation (Brazil).
  2. Bedri Tas, 2004. "Private information of the Fed, predictability of stock returns and expected monetary policy," Money Macro and Finance (MMF) Research Group Conference 2003 100, Money Macro and Finance Research Group.

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