Does the Fed Control Interest Rates?

Abstract:     
Open market rates take sustained swings away from the Federal funds target rate, TF, and on a day-to-day basis, open market rates do not converge to TF. These results document limits on Fed control of rates. The target rate, TF, tracks much of the long-term movement in rates, but the extent to which this is due to active Fed attempts to control rates versus passive accommodation of market forces escapes measurement. Specifically, when the Fed changes TF, it moves toward existing short rates. This suggests that the Fed responds passively to market forces, but it is also consistent with a powerful Fed that moves rates in a predictable way. Short rates respond to unexpected changes in TF, which suggests some Fed control of rates, but unexpected changes in TF are small relative to expected changes, and the effects of unexpected changes dissipate quickly for longer maturities.

Number of Pages in PDF File: 20

working papers series