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Setting the target for the federal funds rate: the determinants of Fed behaviour

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Abstract:

This article analyses the factors the Federal Open Market Committee (FOMC) considers in setting the target for the federal funds rate. The sample consists of 262 FOMC meetings between 1983 and 2005. Statistical results indicate that the Fed's target is inversely related to the unemployment rate and directly related to several measures of expected inflation. Technical factors such as the number of days since the last target change, the size and direction of the previous target change and the gap between the actual federal funds rate and its targeted value were also statistically significant explanatory variables. Estimations were performed using Ordinary Least Squares (OLS), censored regression and two types of ordered probit; but the results proved to be robust regardless of the statistical technique used.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840802600459

Affiliations: 1: Department of Economics and Finance, Arkansas State University, United States 2: HSS Department, Rose-Hulman Institute of Technology, Terre Haute, 47803, United States

Publication date: April 1, 2011

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