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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?

  • Thornton, Daniel L.

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 the Fed adjusts its funds rate target directly in response to changes in the market interest rate is briefly considered.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2000,09.

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Date of creation: 2000
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Handle: RePEc:zbw:bubdp1:4145
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