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Tests of the market's reaction to federal funds rate target changes

  • Daniel L. Thornton

In this article, Daniel L. Thornton tests several hypotheses about the market's reactions to changes in the Federal Reserve's federal funds rate target. Thornton finds that short-term rates and long-term rates responded differently to funds rate target changes when target changes were accompanied by a change in the discount rate. He presents evidence that the smaller response of long-term rates (in these instances) is due to the market revising its inflation outlook when the target is changed. Thornton finds no evidence that the size of the market's response varies with the size of the target change; however, he does find that the response to target changes is somewhat larger when the target change is the first change in a new direction. The reader is cautioned, however, that some of his results are based on a very small number of target changes.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1998)
Issue (Month): Nov ()
Pages: 25-36

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Handle: RePEc:fip:fedlrv:y:1998:i:nov:p:25-36:n:6
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