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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: accountclosed who wrote (63883)2/1/2001 11:08:09 AM
From: flatsville  Read Replies (1) of 436258
 
Antman-

in the volker era, the fed controlled money supply. in the greenspan era, the fed controls the fed funds rate.
wouldn't one expect liquidity to be required to facilitate the 50 basis point reduction in fed funds announced yesterday?

We've been down the road with this question before...shortly after the early Jan. "surprise" rate cut.

If you recall I asked you then "If Uncle Al needs to print to facilitate his .50 point rate reduction, then how do you explain the printathon that occured prior to y2k during a period of rate increase?"

(IIRC you didn't respond?)

If you explain it with the answer y2k, then printing has no real relationship to rates.

I suspect that is the case as this abstract implies:

stls.frb.org

The Relationship Between the Federal Funds Rate and the Fed's Federal Funds Rate Target: Is It Open Market or Open Mouth Operations? by — Daniel L. Thornton

ABSTRACT --1999-022B
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 many target changes represent the endogenous actions of the Fed real shocks and inflation surprises is briefly considered.

This paper is available in Acrobat PDF (359kb) format.
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