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Article: Tests of the market's reaction to federal funds rate target changes.
- Article from:
- Federal Reserve Bank of St. Louis Review
- Article date:
- November 1, 1998
- Author:
CopyrightCOPYRIGHT 1998 Federal Reserve Bank of St. Louis. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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For sometime now, the Fed has implemented monetary policy by making discrete adjustments to its target for the federal funds rate. Given that a change in the funds rate target is taken as a change in monetary policy, it is not surprising that the market reacts to actual and perceived changes in the Fed's funds rate target, [e.g., Cook and Hahn (1989) and Thornton (1996)]. Several interesting hypotheses concerning the market's reaction to target changes deserve closer consideration.
First and foremost, does a target change alter the market's outlook for inflation? It is widely believed that the Fed has been focusing on inflation and has responded to inflation ...