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When did the FOMC begin targeting the federal funds rate? what the verbatim transcripts tell us

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  • Daniel L. Thornton

Abstract

In October 1982 the FOMC deemphasized M1 and moved to what is commonly referred to as a borrowed reserves operating procedure. Sometime thereafter the FOMC switched to a funds rate targeting procedure but never formally announced the change. Given the close correspondence between a borrowed reserves operating procedure and a funds rate targeting procedure, Thornton (1988) suggested that the FOMC went immediately to a funds rate targeting procedure. Others date the switch to the funds rate procedure later. Meulendyke (1998) suggests the switch came in late 1987, while others suggest the change occurred later. This paper reviews the verbatim transcripts of the FOMC meetings to establish the timing of the switch. The verbatim transcripts suggest that the FOMC effectively switched to a funds rate targeting procedure in 1982. The documentary evidence is supported by an analysis of the spread between the funds rate and the funds rate target, which suggests that the differences in the behavior of the spread before October 1979 and after October 1982 are relatively small and economically unimportant.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-015.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2004-015

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Keywords: Federal Open Market Committee ; Federal funds market (United States) ; Federal funds rate ; Monetary policy;

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  1. James D. Hamilton & Oscar Jorda, 2002. "A Model of the Federal Funds Rate Target," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(5), pages 1135-1167, October.
  2. Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
  3. James A. Clouse, 1994. "Recent developments in discount window policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 965-977.
  4. Henry C. Wallich, 1984. "Recent techniques of monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue May, pages 21-30.
  5. Daniel L. Thornton, 1998. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Working Papers, Federal Reserve Bank of St. Louis 1998-009, Federal Reserve Bank of St. Louis.
  6. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  7. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
  8. R. Alton Gilbert, 1985. "Operating procedures for conducting monetary policy," Review, Federal Reserve Bank of St. Louis, issue Feb.
  9. Kalyvitis, Sarantis & Michaelides, Alexander, 2001. "New evidence on the effects of US monetary policy on exchange rates," Economics Letters, Elsevier, vol. 71(2), pages 255-263, May.
  10. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  11. Levin, Fred J & Meulendyke, Ann-Marie, 1982. "Monetary Policy: Theory and Practice: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(3), pages 399-403, August.
  12. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice: A Reply," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(3), pages 404-06, August.
  13. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  14. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
  15. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  16. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(2), pages 231-47, May.
  17. Daniel Thornton & David C. Wheelock, 2000. "A history of the asymmetric policy directive," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 1-16.
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Citations

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Cited by:
  1. Daniel L. Thornton, 2008. "Monetary policy: why money matters and interest rates don't," Working Papers, Federal Reserve Bank of St. Louis 2008-011, Federal Reserve Bank of St. Louis.
  2. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Nautz, Dieter & Offermanns, Christian J., 2008. "Volatility transmission in the European money market," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 23-39, March.
  4. Ellen E. Meade & Daniel L. Thornton, 2010. "The Phillips curve and US monetary policy: what the FOMC transcripts tell us," Working Papers, Federal Reserve Bank of St. Louis 2010-017, Federal Reserve Bank of St. Louis.
  5. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers, Federal Reserve Bank of St. Louis 2006-020, Federal Reserve Bank of St. Louis.
  6. Nautz, Dieter & Scheithauer, Jan, 2011. "Monetary policy implementation and overnight rate persistence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1375-1386.
  7. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the anomalies when the short-term rate is the federal funds rate," Working Papers, Federal Reserve Bank of St. Louis 2000-003, Federal Reserve Bank of St. Louis.
  8. Kobayashi, Teruyoshi, 2009. "Announcements and the effectiveness of monetary policy: A view from the US prime rate," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2253-2266, December.
  9. Lucchetti, Riccardo & Palomba, Giulio, 2009. "Nonlinear adjustment in US bond yields: An empirical model with conditional heteroskedasticity," Economic Modelling, Elsevier, vol. 26(3), pages 659-667, May.
  10. Richard G. Anderson & Kevin L. Kliesen, 2011. "How does the FOMC learn about economic revolutions? evidence from the New Economy Era, 1994-2001," Working Papers, Federal Reserve Bank of St. Louis 2011-041, Federal Reserve Bank of St. Louis.
  11. Christopher J. Neely & S. Rubun Dey, 2010. "A survey of announcement effects on foreign exchange returns," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 417-464.
  12. Vladimir Kotomin & Drew Winters, 2006. "Quarter-End Effects in Banks: Preferred Habitat or Window Dressing?," Journal of Financial Services Research, Springer, Springer, vol. 29(1), pages 61-82, February.
  13. Ellen E. Meade, 2005. "The FOMC: preferences, voting, and consensus," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 93-101.
  14. Daniel L. Thornton, 2009. "The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks," Working Papers, Federal Reserve Bank of St. Louis 2009-037, Federal Reserve Bank of St. Louis.

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