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Is the Fed Funds Rate Still Effective?

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  • John Silvia
  • Azhar Iqbal

Abstract

Both the depth and length of the Great Recession create the impression that the economy proved impervious to monetary policy. Policy rates, such as the federal funds rate (fed funds rate), were set at record lows, but the recovery in housing, employment, and GDP were subpar at best. Now with a self-sustaining expansion, the FOMC began rolling back its asset purchases program and, at some point in the future, it will start increasing its target for the fed funds rate. This raises the questions of whether the fed funds rate remains an effective tool and what effect an altered Federal Reserve balance sheet will have on inflation and the unemployment rate in the post-Great Recession world. Our econometric analysis suggests that since the 1990s, the traditional tools of monetary policy (such as the fed funds rate) may have influenced the unemployment rate but that it did not influence inflation. Thus, the effect a change in the fed funds rate may not be as straightforward as suggested by the conventional economic theory and the traditional link between interest rates and inflation and unemployment may have broken down.

Suggested Citation

  • John Silvia & Azhar Iqbal, 2014. "Is the Fed Funds Rate Still Effective?," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 49(4), pages 253-262, October.
  • Handle: RePEc:pal:buseco:v:49:y:2014:i:4:p:253-262
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