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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (1664)	3/29/2001 3:13:26 PM
From: Keith Monahan	Read Replies (2) \| Respond to of 24758

The good news is that this indicates the stock market has bottomed. I hope so, I'm tired of nibbling and getting slapped.

To: ahhaha who wrote (1664)	3/30/2001 2:01:29 PM
From: ahhaha	Respond to of 24758

From Dan Thornton's paper, "Is it open market operations or open mouth operations", FRB SL 8/00 Additional Evidence—The 1989 Experience It is well known that the Fed has an incentive to adjust its interest rate target with exogenous changes in market rates. Failure to do so would result in an unintended change in policy.33 For example, if interest rates were to rise exogenously and the Fed wished to maintain its target, it would have to increase the growth rate of money in order to resist the upward movement in rates. All other things the same, the failure to raise the target in the face of rising interest rates would eventually result in higher, not lower, nominal interest rates [Friedman (1968)]. The reverse would be true if an exogenous shock caused the interest rate to fall. It is widely believed that the Fed controls the federal funds rate by altering the degree of pressure in the reserve market. More recently, however, several analysts [McCallum (1995), Guthrie and Wright (2000) and Meulendyke (1998)] have suggested that open market operations may not be essential to the Fed’s ability to control the funds rate. All the Fed need do is make its intentions for the funds rate known. Believing that the Fed has the power to enforce its desires, the market works to keep the funds rate close to the target level. Noting that historically there is a close relationship between the federal funds rate and the Fed’s funds rate target, this paper investigates whether the relationship is due to open market operations or open mouth operations. This is done by testing the market’s reaction to actual and perceived changes in the funds rate target. If changes in the funds rate target represent exogenous policy actions that the Fed implements through open market operations, the funds rate should change point-for-point with the funds rate target regardless of whether the market knows that the target has changed. If the Fed controls the funds rate through open mouth operations, the funds rate should change with the target only when the market is aware that the target has changed. There is no statistically significant relationship between changes in the funds rate and target changes during any period when there is a close relationship between the funds rate and the target. Hence, there is no evidence that the Fed moved the funds rate through open market operations. Moreover, the funds rate did not respond even when the market was aware that the target had changed. Some might argue that the lack of response is because the market anticipated the Fed’s actions. There is evidence that the market had difficulty determining when the Fed had acted, let alone anticipating the Fed’s actions. During the 1974-79 period, the market frequently missed the timing and magnitude of target changes. Moreover, the expectations explanation is at odds with the response of the T-bill rate to target changes that the market knew (or thought) had occurred. If the funds rate did not respond because the market anticipated the Fed’s action, why did the T-bill rate respond? Beginning in the late 1980s or early 1990s, the market became aware that the Fed was targeting the funds rate. Since February 1994, the Fed has announced target changes immediately. Hence, it is conceivable that the close relationship between the funds rate and the funds rate target in recent years is due to open mouth operations. Open mouth operations cannot account for the close relationship between the funds rate and the target during other periods, however. The documented uncertainty about the timing and magnitude of target changes during the 1974-79 period raises doubts about the role of open mouth operations during this period. The strongest evidence against the open-mouth-operations hypothesis, however, is the fact that the relationship between the funds rate and the funds rate target was close during the 1984-89 period when the market was unaware that the Fed was targeting the funds rate.