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To: Ilaine who wrote (62877)	1/30/2001 3:41:58 PM
From: Mark Adams	Respond to of 436258

I understood it to mean just the act of publishing a new funds rate caused the market it price that in. He discusses the New Zealand reserve board driving interest changes by merely expressing the desired state, yet remain willing to act if required. If I read correctly, the fact that the fed keeps rates above real market rates implies they are still restraining, despite the December move to neutral. And there is the posiblity that the real market is out of touch, which the article does not consider. Does the writer ever define what he means by "open mouth operations"? I assume he means that the Fed announces a target rate and the market moves it there without any further action on the part of the Fed but am not sure. Heavily edited: 7. Conclusions ... It is widely believed that the Fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations. It is thought that the Fed increases the funds rate when it raises its funds rate target by draining reserves from the banking system and reduces the funds rate by injecting reserves when it reduces the target. There is no evidence, however, of a significant negative relationship between narrow monetary aggregates, which are most directly affected by open market operations, and short-term interest rates. Finding essentially no evidence to support either open market operations or open mouth operations, I consider a possibility that changes in interest rates are primarily driven by real shocks and inflation surprises and the markets respond to such shocks before the Fed does. ... that the equilibrium natural rate of interest is determined by real factors. Shocks to the real economy or inflation surprises cause monetary policy to become easier or tighter at an unchanged nominal interest rate target. Faced with such shocks, policymakers must change the funds rate target simply to maintain the stance of monetary policy. If policymakers respond more slowly to shocks than the market, market rates can move in advance of changes in the funds rate target. This does not imply that changes in interest rates “caused” the Fed to change its target, per se. Rather both rate changes are driven by the same shock: one group of economic agents simply moves more slowly than the other. The possibility that some target changes reflect endogenous responses to exogenous shocks does not imply that all are. Target changes that are larger than required to restore policy to its pre-shock stance represent changes in the stance of policy.