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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

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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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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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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!]
  2. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May. [Downloadable!] (restricted)
  3. James A. Clouse, 1994. "Recent developments in discount window policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 965-977.
  4. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice: A Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 404-06, August. [Downloadable!] (restricted)
  5. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April. [Downloadable!] (restricted)
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  6. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
  7. 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. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
  9. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February. [Downloadable!] (restricted)
  10. Thornton, Daniel L., 2001. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1717-1739, September. [Downloadable!] (restricted)
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  11. R. Alton Gilbert, 1985. "Operating procedures for conducting monetary policy," Review, Federal Reserve Bank of St. Louis, issue Feb. [Downloadable!]
  12. 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. [Downloadable!]
  13. 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. [Downloadable!] (restricted)
  14. James D. Hamilton & Oscar Jorda, 2002. "A Model of the Federal Funds Rate Target," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1135-1167, October. [Downloadable!] (restricted)
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  15. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54. [Downloadable!]
  16. Levin, Fred J & Meulendyke, Ann-Marie, 1982. "Monetary Policy: Theory and Practice: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 399-403, August. [Downloadable!] (restricted)
  17. Jeffrey H. Nilsen, . "Borrowed Reserves, Fed Funds Rate Targets, And the Term Structure," EPRU Working Paper Series 97-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers 2006-020, Federal Reserve Bank of St. Louis. [Downloadable!]
  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. [Downloadable!]
  3. Ellen E. Meade, 2005. "The FOMC: preferences, voting, and consensus," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 93-101. [Downloadable!]
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