The Effect of Changes in the Federal Funds Rate Target on Market Interest Rates in the 1970s

Abstract

The standard empirical test of whether the Federal Reserve can influence interest rates is to regress interest rates on current and past (actual or unexpected) values of money growth. This literature generally finds little support for the view that the Fed can influence interest rates, except perhaps through the positive impact on inflation expectations of increases in money growth. Based on an exhaustive survey of the empirical studies on the impact of money growth on short-term interest rates, Reichenstein concludes that "the Fed appears to have little control over month-to-month changes in [short-term] interest rates."