Market vs. administered Federal Reserve policy rates

Author:

Walker David

Abstract

Purpose – The purpose of this study is to contrast the discount and the Fed funds rates since 1990 and the variables that influence these rates. On the basis of quarterly data, since 1990, the primary determinants of the two policy rates are: the rate of inflation, the unemployment rate and rates on US Treasury securities, i. Design/methodology/approach – Ordinary least squares models are developed with autocorrelation removed. Findings – 12 per cent level in the Fed funds market rate models. The statistical significance of the coefficient of the spread between long-term and short-term Treasury rates is a projection of a recession one year in the future. The statistical significance of the coefficients for unemployment, one and two quarter the autocorrelation coefficients, adjusted R-square values and Durbin-Watson statistics are similar for the two policy rate models. Research limitations/implications – The major limitation is that monthly data are not available for further tests. Practical implications – The two Fed policy rates respond differently to the impacts of inflation, unemployment and yield curve tilts. Social implications – Expected recessions, reflected by the yield curve are not often anticipated. Originality/value – The approach and results have a different perspective from the work in most studies involving Federal Reserve policy rates.

Publisher

Emerald

Subject

Economics and Econometrics,Finance

Reference33 articles.

1. Bartolini, L. , Bertola, G. and Prati, A. (2002), “Day-to-day monetary policy and the volatility of the fed funds rate”, Journal of Money, Credit and Banking, Vol. 34 No. 1, pp. 137-159.

2. Baum, C.F. and Karasulu, M. (1997), “Modelling federal reserve discount policy”, Computational Economics, Vol. 11 Nos 1/2, pp. 53-70.

3. Bernanke, B.S. and Binder, A. (1992), “The federal funds rate and the channels of monetary transmission”, American Economic Review, Vol. 82 No. 4, pp. 901-921.

4. Board of Governors of the Federal Reserve Testimony (2014a), Semiannual Monetary Policy Report to the Congress, Board of Governors of the Federal Reserve Testimony, Washington, DC.

5. Board of Governors of the Federal Reserve Press Release (2014b), FOMC, Board of Governors of the Federal Reserve Press Release, Washington, DC.

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