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Working Paper 88-7
DETERMINANTS OF THE FEDERAL FUNDS RATE:
1979 - 1982
Timothy Cook
Federal Reserve Bank of Richmond
March 1989
I am grateful to Marvin Goodfriend for numerous helpful comments and
suggestions on this paper. The views expressed in the paper are mine and
do not necessarily represent those of the Federal Reserve Bank of
Richmond or the Federal Reserve System.
DETERMINANTS OF THE FEDERAL FUNDS RATE: 1979-1982
In the late 1970s the money stock was growing at a faster rate than
desired, the rate of inflation was accelerating, and the dollar was steadily
depreciating in the foreign exchange markets.
In an attempt to reverse these
developments the Federal Reserve on October 6, 1979 announced several actions,
including a change in its operating procedures to place more emphasis on
managing the growth of bank reserves in order to improve monetary control.I The
new procedures are generally thought to have remained in place until October 9,
1982, when Federal Reserve Chairman Paul Volcker announced that the Fed was
going to temporarily place less emphasis on the money stock (Ml) in its policy
decisions.
The period between October 1979 and October 1982 was characterized
by unusually high and volatile short-term interest rates, volatile money growth
rates, and --
inflation.
towards the end of the period --
a sharp drop in the rate of
Many accounts of this period have attributed these developments to
the new procedures.
The issue addressed in this paper is how the Fed's operating procedures
actually changed in October 1979 and, more specifically, how movements in the
federal funds rate were determined.2
Before October 1979, the Federal Open
Market Committee (FOMC) at each meeting set an initial target for the funds rate
IFor an account of the developments leading up to the change in operating
procedures, see "Fed Takes Strong Steps to Restrain Inflation, Shifts Monetary
Tactic," Wall Street Journal, October 8, 1979, p. 1.
The federal funds rate is the rate on overnight loans of reserves between
depository institutions. Changes in the funds rate are important because they
generally lead to changes in other short-term interest rates.
2
- 2 -
and gave a set of instructions to the Account Manager at the Federal Reserve
Bank of New York (the "Desk") on how to adjust the funds rate over the period
until the next FOMC meeting.
These instructions related desired movements in
the funds rate to the projected growth rates of MI and M2 (relative to the
short-run tolerance ranges specified by the FOMC) and to other factors such as
inflation, economic activity and the behavior of the dollar in the foreign
exchange markets.
Each week the Desk reset the target for the funds rate based
on the behavior of these variables and the latest instructions it had received
from the FOMC.
The Fed stopped setting explicit targets for the funds rate after October
6, 1979, and a widely held view is that funds rate movements over the following
three years were determined by market forces rather than by the Fed.3
According
to this view, the critical aspect of the new procedures was that the Fed fixed
the supply of nonborrowed reserves available to depository institutions so that
increases in the money stock and hence in the demand for required reserves would
automatically cause increases in the funds rate and other short-term rates.
(The mechanism by which this occurred is described below.)
Despite the widespread emphasis on the automatic adjustment in descriptions
of the post-October 1979 operating procedures, it was well-recognized at the
time that movements in the funds rate under the procedures could also result
from purely judgmental actions of the Federal Reserve.
These actions included
For example, see Stigum [1983, p. 369]: "At that time, the Fed decreed
that the rate at which funds traded would be wherever market forces took it,
which turned out to be all over the lot;" and Morris [1983, p.5 1: "The new
policy regime initiated in October 1979 was unique, not in that we established
money growth targets, but that we sought to achieve them by managing the rate of
growth of bank reserves, allowing short-term rates to be largely market
determined."
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- 3 -
(1) judgmental adjustments to the supply of nonborrowed reserves in the period
between FOMC meetings, (2) judgmental adjustments initiated at an FOMC meeting,
(3) changes in the discount rate, and (4) changes in the surcharge that at times
during the period was added to the basic discount rate and applied to large
banks.
This paper evaluates whether funds rate movements from October 1979 to
October 1982 were determined by market forces interacting with a nonborrowed
reserve rule or largely on a judgmental basis by the Federal Reserve as in other
periods.
To make this evaluation, the paper presents a detailed breakdown and
analysis of the policy actions affecting the funds rate in this period.
I
conclude that while some of the movement in the funds rate over this period
resulted from the automatic adjustment, most of the movement --
roughly
two-thirds -- was due to judgmental actions of the Federal Reserve.
I.
ANALYTICAL FRAMEWORK
Increases in the federal funds rate in the period from October 1979 through
October 1982 came about in two general ways.
The first was through an increase
in the amount of reserves that banks had to borrow at the discount window (i.e.
the amount not supplied by the Fed in the form of nonborrowed reserves),
hereafter called the "borrowed reserves target."5 The demand by banks for
It should be emphasized that most Federal Reserve descriptions of the
operating procedures in this period did not claim that funds rate movements were
being determined solely by the automatic adjustment. Levin and Meek [1981],
Volcker [1980], and the New York Federal Reserve Bank's reviews of monetary
policy and open market operations [1980, 1981, 1982, 1983] all describe the
effects on the funds rate of judgmental adjustments to the supply of nonborrowed
reserves and changes in the discount rate and surcharge.
The term generally used in this period to denote the initial borrowing
level specified by the FOMC for an intermeeting period was the "borrowed reserve
assumption." This term was used because -- as will be explained later in the
(Footnote Continued)
- 4 -
borrowed reserves depends positively on the spread between the federal funds
rate and the discount rate.
Therefore, in general, the larger the amount of
reserves banks had to borrow at the discount window, the greater the spread
between the funds rate and the discount rate necessary to induce them to borrow
these reserves.
Consequently, at a given discount rate an increase in the
amount of reserves banks had to borrow resulted in a higher funds rate.
Increases in the funds rate in this period also resulted from increases in the
basic discount rate or the surcharge.
The funds rate had to rise following an
increase in the discount rate in order to maintain the spread between the two
rates necessary to achieve the borrowed reserve target in the current week.
The approach taken in this paper is to track changes in the borrowed
reserve target, the discount rate, and the surcharge from October 1979 to
October 1982 and to estimate how much of the resulting movement in the funds
rate was attributable to the automatic adjustment and how much to judgmental
actions by the Fed.
The basic analytical procedure is to construct a series of
tables which document the timing and cause of changes in the borrowed reserve
target as well as the timing of changes in the discount rate and the surcharge.
Table I illustrates the procedure with data for the period beginning after the
March 31, 1981 FOMC meeting and ending May 20, 1981, the day following the next
(Footnote Continued)
article - under the procedures the amount of reserves that banks had to borrow
in the period between FOMC meetings depended on the growth rate of money, which
was unknown at the beginning of the period. Hence, the initial borrowing level
changed as the period developed. The borrowing level specified for a particular
week within the intermeeting period was in effect a target because under the
prevailing system of lagged reserve requirements a target for nonborrowed
reserves implied a specific level of borrowed reserves. To simplify the
discussion and the presentation of the data, I use "target" for both purposes.
As will be clear in the text, the use of that term is not meant to suggest that
the borrowing level initially specified by the FOMC was fixed throughout the
intermeeting period.
- 5 -
FOMC meeting.
Over this period the funds rate rose 3.96 percentage points.
Similar tables for each of the intermeeting periods from October 1979 to October
1982 are in Appendix A.
Appendix B.)
(A compact version of these tables is provided in
All information in Table I is from the weekly Report of Open
Market Operations prepared by the Federal Reserve Bank of New York.
The
explanatory notes at the bottom of the table are direct quotes from the Report.
This section of the paper works through Table I to identify how much of the
change in the borrowed reserve target in the intermeeting period ending May 20,
1981 resulted from the automatic adjustment and how much resulted from
judgmental actions taken by the Federal Reserve.
This information is used
together with the changes in the discount rate and surcharge documented in
Table I to estimate the amount of the change in the funds rate in this
intermeeting period resulting from the automatic adjustment and the amount
resulting from judgmental actions by the Fed.
The following section of the
paper provides similar estimates for the full period from October 1979 to
October 1982.
The Initial Borrowed Reserve Target
In the post-October 1979 period the
Federal Open Market Committee (FOMC) at each meeting chose an initial target for
borrowed reserves for the period until the subsequent meeting.
This target,
which was generally called the "borrowed reserve assumption," is shown in column
3 of Table I.
As noted above, the demand by banks to borrow reserves at the
discount window largely depends on the spread between the federal funds rate and
the discount rate.
Hence, in choosing an initial target for borrowed reserves
the FOMC was indirectly setting an initial level for the funds rate in the
intermeeting period.
(Of course, this funds rate level also depended on the
prevailing discount rate.)
At its March 31, 1981 meeting, the FOMC set an
initial target for borrowed reserves for the intermeeting period ending May 20,
- 6 -
1981 of $1150 million.
This figure was only slightly below the $1162 million
borrowing target in the last week of the previous intermeeting period.
The Automatic Adjustment in the Borrowed Reserve Target At each meeting
the FOMC also set short-run targets for Ml and M2 over a period of two to four
months.
These targets are shown in column I of Table I, and the most recent
projections of money growth are shown in column 2.7
The staff constructed a
"path" for total reserves consistent with the money supply targets.
In
constructing the total reserve path, the staff allowed for the projected mix of
currency and deposits and the projected demand by banks for excess reserves, and
it took into account the reserve requirements for various categories of
deposits.
In practice, many of the non-Mi components of M2 were nonreservable
and reserves on other components were being phased out under the Monetary
Control Act.
As a result, the total reserve path was determined primarily by
the Ml target.
The staff also constructed a path for nonborrowed reserves by subtracting
the FOMC's initial target for borrowed reserves from the total reserve path.
The paths for total and nonborrowed reserves were then translated into reserve
This brief description of the automatic adjustment is taken primarily from
Volcker [19801. For additional detail see Levin and Meek [1981] and the annual
reports on monetary policy and open market operations by the Federal Reserve
Bank of New York [1980, 1981, 1982, 19831. Hetzel [19861 provides a
chronological review of the implementation of the post-October 1979 procedures,
and Goodfriend et. al. [1986] provide a weekly rational expectations model of
the procedures. Other discussions of the procedures are in Hetzel [1982], Poole
[19821 and Spindt and Tarhan [19871.
6
The projections of the monthly growth rates of the monetary aggregates
shown in Table I are those made by the staff of the Board of Governors. If
projections for a particular month were supplied by the New York staff but not
the Board staff, then the New York staff's forecasts are shown in the table.
All forecasts of monthly growth rates available from the Report of Open Market
Operations are reported in the table.
7
- 7
levels covering the shorter periods between FOMC meetings.
The System Account
in the
Manager (the "Desk") was instructed to conduct open market operations
intermeeting period in a manner consistent with achieving the nonborrowed
reserve path.
The central feature of the procedures was that as the intermeeting period
progressed, the path for nonborrowed reserves was to be held fixed.
If, for
example, the projected growth rate of money in the intermeeting period rose
above the target set by the FOMC, then the projected level of total reserves
would rise above the path level of total reserves.
With the nonborrowed reserve
of total
path held fixed, the emerging gap between the projected and path levels
reserves due to the stronger-than-targetedmoney growth would cause an increase
in the amount of reserves that had to be borrowed at the discount window.
The
the
funds rate would rise in the current week until the spread between it and
these
discount rate was large enough to induce banks in the aggregate to borrow
additional reserves.
The result was that stronger-than-targeted money growth
would automatically cause a rise in the funds rate, which was supposed to bring
money growth back to target over time.
as
In practice, the Desk made two modifications to the automatic adjustment
described above.
First, although the Desk held the average nonborrowed reserve
reserves
path fixed when there was an increase in the projected demand for total
the
in the intermeeting period, it typically made offsetting adjustments to
the
weekly nonborrowed reserve path in order to maintain steady borrowing over
remaining weeks of the period (Levin and Meek [1981, pp. 7-8]).
Suppose, for
example, that in the middle of a six-week intermeeting period new information
increased the projected demand for total reserves by an average of $300 million
week
over the remaining three weeks of the period, consisting of $100 million in
4, $300 million in week 5, and $500 million in week 6.
In this situation the
- 8 -
Desk would reduce the nonborrowed reserve path by $200 million in week 4, leave
it unchanged in week 5, and raise it by $200 million in week 6.
The result
would be to raise the borrowed reserve target for each of the remaining three
weeks in the period by an equal amount of $300 million.
The second modification to the automatic adjustment described above was
that the Desk made "technical" adjustments to the paths for total and
nonborrowed reserves to allow for changes in the estimates of excess reserves
and required reserves against deposits not included in Ml and M2.
Suppose, for
instance, that in the intermeeting period the demand for total reserves
unexpectedly rose by $50 million due to an increase in the demand for excess
reserves and by $50 million due to an increase in required reserves against bank
liabilities not included in Ml or M2.
If the Desk made no allowance for these
factors, the necessary discount-window borrowing by banks would rise by $100
million.
The higher borrowing level would force a rise in the funds rate even
though there had been no increase in the projected growth of Ml or M2.
To
forestall this outcome, the Desk could raise the total and nonborrowed reserve
paths by $100 million.
In the Report of Open Market Operations, the Desk reported a gap between
the projected and path level of total reserves as an average over all the weeks
in the intermeeting period.
In the above example, where the projected demand
for total reserves rose by $100 million, $300 million, and $500 million in the
last three weeks of a six-week intermeeting period, the Desk would have raised
the gap by $150 million [(100 + 300 + 500)/61.
The Desk divided fifteen of the
twenty-six intermeeting periods into two subperiods, including the period shown
in Table I.
In these cases the reserve averages were calculated separately for
each subperiod.
- 9 -
Column 4 in Table I shows the gap between the average projected and path
levels of total reserves for the intermeeting period ending May 20, 1981.
As
the period developed, the stronger-than-targetedmoney growth raised the
projected level of total reserves.
The positive gap between the projected and
path levels of total reserves that normally would have resulted from the
stronger-than-targetedmoney growth did not appear at the end of the first
subperiod (April 29) because, in order to smooth the transition between the two
subperiods, the Desk decided not to make any of the sizable potential downward
technical adjustments to the total and nonborrowed reserve paths (note c in
Table I).9
These adjustments were made in the second subperiod, however, and in
In practice, the initial gap between the projected and path levels of
total reserves at the time of the FOMC meeting was set equal to zero, although
the gap could change in the first week of the intermeeting period if on the
Friday following the FOMC meeting (usually on Tuesday) the staff's forecasts for
the monetary aggregates differed from those made at the meeting. Setting the
initial reserve gap equal to zero did not constrain the FOMC, since if the FOMC
wished to engineer a change in the funds rate at the time of the meeting, it
could do so by changing the borrowed reserve target from recent borrowing
levels.
8
The sense in which the transition between the two subperiods was
"smoothed" by this decision is as follows. In the first three weeks of the
first subperiod, the actual borrowing level (column 8) ran below the borrowing
target for the remaining weeks in the subperiod (column 7) -- henceforth called
the "weekly" target (discussed later in this section). Because of these past
misses, the weekly target had to rise steadily as the subperiod progressed in
order to achieve the average borrowed reserve target. The Desk did not make any
of the downward technical adjustments to the reserve paths at the end of the
first subperiod -- which would have caused a rise in the revised average and
hence weekly borrowed reserve targets -- because the weekly target had already
risen sharply. If the Desk had made the technical adjustments, the weekly
target would have climbed more than it did at the end of the first subperiod and
then fallen at the beginning of the second subperiod, rather than rising from
the first to the second subperiod as shown in column 7 of Table I. This example
illustrates the operational difficulties in setting targets for average reserve
levels.
9
-
10 -
that subperiod the gap between the projected and path levels of total reserves
rose sharply.
The final gap of $389 million for the intermeeting period caused
an automatic increase in the average borrowed reserve target of that magnitude.
Judgmental Adjustments in the Average Borrowed Reserve Target
The Desk
could also make judgmental adjustments in the average nonborrowed reserve path
during the intermeeting period, which would cause offsetting adjustments of the
same magnitude in the average borrowed reserve target.
The judgmental
adjustments in the intermeeting period ending May 20, 1981 are shown in column 5
of Table I, and the Desk's explanations for them are given in the notes at the
bottom of the table.
In the fifth week of the period (May 6) "given the size of
the reserve gap, a decision was made, in consultation with the Chairman," to
lower the average nonborrowed reserve path by $250 million and thereby raise the
average borrowed reserve target by an equal amount (note d).
In the sixth week
(May 13) it was decided for the same reason to make another judgmental increase
in the average borrowed reserve target of $120 million (note fl).
At the same
time, the Desk increased the average borrowed reserve target by an additional
$114 million "because of the undershoot in nonborrowed reserves" in the previous
week (note f2).
The total of $484 million of judgmental adjustments over the
10 The reasoning behind this adjustment was as follows. The demand for
borrowed reserves was stronger than anticipated in the first week of the second
subperiod, and the Desk decided to allow borrowing to come in over target (and
nonborrowed reserves under target) in order not to dilute the effect on the
funds rate of the increase in the discount rate that week (note e in Table I).
In order to accommodate this miss in the borrowed reserve target, the next week
the Desk raised the average borrowed reserve target for the subperiod by $114
million. If the Desk had not made this adjustment, the weekly borrowing target
and the expected funds rate would have been lower in the last two weeks of the
subperiod. The Desk occasionally made this type of adjustment to prevent misses
in the weekly borrowed reserve target early in an intermeeting period or
subperiod from unduly affecting the weekly target later in the period. This
type of adjustment is discussed in more detail later in the article (pp. 22-23).
-
11
-
period more than doubled the increase in the average borrowed reserve target
that would have resulted from the automatic adjustment alone.
As a result, over
the period the average target, shown in column 6 of Table I, rose by a total of
$873 million from $1150 million to $2023 million.
Determination of the Weekly Borrowed Reserve Target
Column 7 in Table I
shows the borrowed reserve target for the current and remaining weeks in the
period (henceforth called the "weekly target").
This target, together with the
discount rate, determined the expected funds rate in the current week.
Changes
in the weekly borrowed reserve target resulted from changes in the projected
demand for total reserves over the period and from deviations of actual
borrowing from target in the previous weeks of the period.
To understand the
I
calculation of the weekly target, it is useful to work through a week in Table
in detail.
Consider the third week of the first subperiod (April 22), when the
borrowed reserve target for the remaining two weeks in the subperiod rose by
$198 million from $1282 million to $1480 million.
Column 4 shows that in this
week the average gap over the subperiod between the projected demand for total
reserves and the path level rose from $33 million to $97 million.
As explained
above, this meant that there was an increase in the cumulative projected demand
for total reserves over the four-week subperiod of $256 million [(97 - 33) x 4].
With a fixed nonborrowed reserve path, the borrowed reserve target over the
remaining two weeks in the subperiod had to go up by $128 million (256/2) to
supply these additional reserves.
The borrowed reserve target for the remaining
weeks in the subperiod also had to offset the deviation of $140 million between
the borrowed reserve target and the actual level of borrowing in the second week
of the subperiod (1282 - 1142).
With a fixed nonborrowed reserve path, the
borrowed reserve target in the remaining two weeks had to rise by $70 million
(140/2) to offset this miss.
Together, the increase in the projected demand for
- 12 -
total reserves and the miss in the target the second week caused a rise in the
target for the third and fourth weeks of $198 million (128 + 70) to $1480
million.
The borrowed reserve target for the current and remaining weeks in a period
can also be calculated in Table I directly from the average borrowed reserve
target and the actual level of borrowing in the previous weeks in the period.
The average target in the third week of the first subperiod was $1247 million
(1150 + 97).
Given borrowing of $887 million and $1142 million in the first and
second weeks of the subperiod (shown in column 8), the implied borrowing target
for the two remaining weeks was $1480 million [(1247 x 4 - 887 - 1142)/21, which
--
as derived above --
$1282 million.
was up $198 million from the previous week's target of
Over the whole intermeeting period ending May 20, 1981, the rise
in the average borrowed reserve target of $873 million (2023 - 1150) led to a
total rise in the weekly target of $713 million (1863 - 1150).
The Discount Rate and Surcharge Increases in the discount rate were an
important determinant of the funds rate in the October 1979 to October 1982
period.
As indicated earlier, the funds rate had to rise following an increase
in the discount rate in order to maintain whatever spread was necessary to
achieve the borrowed reserve target in the current week.
On two occasions
during the period from October 1979 to October 1982 a surcharge was added to the
basic discount rate and applied to banks with deposits over $500 million that
borrowed for two consecutive weeks or for more than four weeks in a calendar
quarter.
(After October 1, 1981 the calendar quarter was changed to a moving
For discussions of the relationship between the funds rate and the
discount rate under the October 1979 operating procedures, see Broaddus and Cook
[19831 and Sellon and Seibert [19821.
1 1
-
13-week period.)
13 -
Increases in the surcharge also put upward pressure on the
funds rate, although the effect was smaller than for increases in the basic
discount rate because only large banks were subject to the surcharge (Sellon and
Seibert [1982, pp. 9-12]).
As shown in column 11 of Table I, in the intermeeting period ending May 20,
1981 there was a one percentage point increase in both the discount rate and the
surcharge.
The discount rate and the surcharge together with the weekly
borrowed reserve target were used by the Desk to derive an expected federal
funds rate for the week, shown in column 9.
The actual level of borrowed
reserves and the actual funds rate for the week are shown in columns 8 and 10.
Determination of the Funds Rate
In summary, in the intermeeting period
ending May 20, 1981 the funds rate was pushed up by the automatic adjustment in
the borrowed reserve target resulting from the positive gap between the
projected and path levels of total reserves, by judgmental adjustments to the
borrowed reserve target, and by increases in the discount rate and the
surcharge.
The effect of each of these factors on the funds rate depends on the
characteristics of the demand function for borrowed reserves.
Empirical work
indicates that a $100 million increase in borrowed reserves in this period was
associated with an increase in the spread between the funds rate and the
discount rate of roughly 25 basis points. 2
(The Fed has long used this
Sellon [1985] shows that the estimated relationship between the spread
and the level of borrowing in the post-October 1979 period is sensitive to the
choice of the dependent variable in the estimated regression equation and the
treatment of the surcharge in the equation. In equations with a surcharge
variable, the estimated effect on the spread of a $100 million increase in the
level of borrowing is 31 basis points when borrowing is the dependent variable
and 17 basis points when the spread is the dependent variable, although the
latter estimate drops sharply if a correction for autocorrelation is made. In
equations with borrowing as the dependent variable and a surcharge dummy
(Footnote Continued)
1 2
- 14 -
estimate in relating borrowing levels to the spread.)
Using this relationship
one can estimate that the $713 million increase in the weekly borrowed reserve
target over this period raised the funds rate by 178 basis points.
Forty-five
percent of the increase in the weekly borrowed reserve target was due to the
automatic adjustment in the average borrowed reserve target (389/873), and 55
percent was due to judgmental adjustments in the average borrowed reserve target
(484/873).
Hence, one can estimate that the automatic adjustment raised the
funds rate by 79 basis points, while the judgmental adjustments raised it by 99
basis points.
The small $13 million reduction in the borrowed reserve target
made at the beginning of the period by the FOMC lowered the funds rate by 3
basis points.
As discussed above, under the October 1979 procedures a one percentage
point increase in the discount rate would be expected to raise the funds rate by
roughly an equal amount, and this expectation is confirmed by the estimates of
Sellon and Seibert [1982].
Hence, I attribute a one percentage point increase
in the funds rate to the discount rate increase.
Sellon and Seibert estimate
that a one percent surcharge raised the funds rate by approximately 65 basis
points, and I use that estimate in this paper.13
(Footnote Continued)
variable entered multiplicatively with the spread, the effect of a $100 million
increase in borrowing when the surcharge is zero is 20 basis points in one
subperiod and 31 basis points in the second subperiod.
13As Sellon (1985, pp. 12-181 emphasizes, it is difficult to obtain
meaningful estimates of the impact of the surcharge on the funds rate. The
surcharge was imposed only two times, and the first time occurred in the midst
of the 1980 credit controls. The effect of the elimination of the surcharge on
the funds rate is particularly difficult to evaluate because in both cases the
elimination occurred just as the funds rate was slipping below the discount rate
and the Desk was effectively going off the nonborrowed reserve procedures. In
any case, attributing the funds rate declines in these periods to a breakdown in
the procedures rather than to the elimination of the surcharge would not affect
(Footnote Continued)
- 15 -
To sum up, estimates of the contribution of the various factors to
20, 1981
movements in the funds rate over the intermeeting period ending May
are:
FOMC lowering of borrowed reserve target at beginning of period:
-.03
automatic upward adjustment of borrowed reserve target:
.99
judgmental upward adjustments in borrowed reserve target:
.79
1.00
discount rate increase:
.65
surcharge:
The estimate of the total rise in the funds rate over this intermeeting period
3.96
is 3.40 percentage points, which is somewhat below the actual increase of
percentage points.
A little under 30 percent of the estimated increase in the
funds rate can be attributed to the automatic adjustment.
The rest resulted
from judgmental decisions of the Fed.
Breakdown in the Automatic Adjustment The automatic adjustment illustrated
below
in Table I did not function whenever the demand for total reserves fell
the nonborrowed reserve path.14
In this situation the federal funds rate
a
dropped below the discount rate and fell to whatever level the FOMC set as
constraint (Levin and Meek [1981, p. 261).
In such periods borrowing at the
and
discount window was no longer sensitive to the spread between the funds rate
the discount rate.
Consequently, cuts in the discount rate had no effect on the
(Footnote Continued)
the overall allocation of funds rate movements between those due to the
automatic adjustment and those due to judgmental Fed decisions, since movements
in the funds rate resulting from either cause fall into the latter category.
14 Strictly speaking, the procedure also broke down when the FOMC had
flexible short-run targets for the monetary aggregates within the intermeeting
period. For instance, in the intermeeting period ending July 8, 1981 the FOMC's
short-run target for M1B was 3% or less. In this period the Desk accommodated
the weak growth in M1B by making weekly downward adjustments in the reserve
paths. (See Table 16 in Appendix A.)
- 16 -
funds rate.
period:
There were three such episodes in the October 1979 to October 1982
(1) from the middle of the intermeeting period ending May 21, 1980 to
the first week of the intermeeting period ending September 17, 1980;
(2) most
the
of the intermeeting period ending August 25, 1982; and (3) a brief period at
beginning of the intermeeting period ending December 23, 1981.
Table II shows the intermeeting period ending July 9, 1980, when the funds
rate was well below the discount rate.
In this situation the Desk simply fixed
the average borrowed reserve target at a minimal level of $100 million and
adjusted nonborrowed reserves to reflect changes in required reserves.1 5
The
to
funds rate was effectively set on a week-to-week basis at a level acceptable
the FOMC.
Also, the two cuts in the discount rate in this period had no
apparent effect on the actual funds rate or on the funds rate expected by the
Desk.
II.
ALLOCATION OF MOVEMENTS IN THE FUNDS RATE OVER THE POST-OCTOBER 1979 PERIOD
Table III provides estimates of the movements in the funds rate over the
period from October 1979 through June 1982, excluding the intermeeting periods
rate
ending July 9, 1980, August 13, 1980, and August 25, 1982, when the funds
was below the discount rate and the automatic adjustment was not functioning.16
The breakdown of the procedures in this period is discussed in the New
p.
York Fed's 1980 review of monetary policy and open market operations [1981,
to
began
Desk
the
levels,
frictional
to
72]: "As implied borrowing moved down
through
time
to
time
from
recurred
encounter operational difficulties that
July."
1 5
16I exclude the intermeeting period ending October 6, 1982 from the
discussion altogether because the nonborrowed reserve procedures had effectively
of the
been abandoned by this time even though Chairman Volcker's announcement
the
with
line
In
deemphasis of Ml did not come until the end of the period.
to
paths
reserve
the
FOMC's instructions, the Desk in this period adjusted
(Footnote Continued)
ad,
C"7
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TABLE 3: ESTIMATES OF MOVEMENTS IN THE FUNDS RATE
TOTAL
CONTRIBUTING FACTORS
Interaeeting
Period
Ending
DiscreTarget
tionary
Autoeatic
Change
by FORC Adjusteents Adjusteents
Discount
Rate
Increase
Surcharge
Estisated
Funds Rate
Change
1.26
-1.05
-0.75
5.56
-0.11
-6.20
na
na
1.65
2.43
1.71
3.00
-1.32
0.15
3.40
-1.23
0.09
-1.97
-2.23
-1.05
2.88
-0.24
-0.90
-0.07
na
21-Nov-79
09-Jan-B0
06-Feb-80
19-Mar-8O
23-Apr-80
21-Nay-S0
09-Jul-80
13-Aug-80
17-Sep-80
22-Oct-80
19-Nov-80
17-Dec-80
04-Feb-81
01-Apr-81
20-May-81
08-Jul-81
19-Aug-61
07-Oct-81
18-Nov-61
23-Dec-81
03-Feb-82
31-Mar-82
19-May-82
30-Jun-62
25-Aug-82
0.00
-0.05
-0.75
1.38
1.41
-0.81
0.25
-0.06
-0.05
-0.01
-0.07
-0.29
-0.32
0.50
-0.03
0.59
0.32
-0.02
-0.08
0.00
-0.13
0.00
-0.64
-0.61
-0.54
0.49
-0.52
0.00
1.16
-2.30
-4.18
0.00
0.05
1.22
0.99
0.52
0.18
-3.09
-0.35
0.79
-1.01
-0.15
-1.29
-1.01
0.13
2.01
-0.16
-0.14
0.33
-0.73
0.06
-0.48
0.00
1.18
-0.32
0.74
0.00
0.00
0.48
0.45
0.26
0.14
2.09
0.00
0.99
-0.81
-0.07
0.00
-0.12
-0.25
0.99
-0.08
-0.12
0.20
-0.51
0.71
0
0
1
0
0
0
0
0
1
0.43
1.57
0
0
1
0
0
0
0
0
0
0
0
0
0
0.00
0.00
0.00
0.84
.1.11
-1.95
0.00
0.00
0.00
0.00
0.56
1.39
0.00
0.00
0.65
0.00
0.00
-0.65
-1.02
-0.93
0.00
0.00
0.00
0.00
0.00
Absolute
Total#
8.06
22.02
9.83
5.71
9.10
*Excludes 9-July-80, 13-Aug-60 and 25-Aug-82
Actual
Funds Rate
Change
1.10
0.84
-1.14
3.44
1.32
-6.85
-1.45
-0.41
1.79
1.91
2.67
4.61
-2.64
-2.26
3.96
1.04
-1.74
-2.73
-2.29
-0.74
2.34
0.22
-0.32
0.14
-5.77
- 17 -
As in the example above, Table III allocates movements in the funds rate over
this period to five sources:
the automatic adjustment in the borrowed reserve
target in the intermeeting period, judgmental adjustments in the borrowed
reserves target in the intermeeting period, adjustments in the borrowed reserve
target made at FOMC meetings, discount rate changes, and changes in the discount
rate surcharge.
The assumptions used to allocate movements in the funds rate to
each of these factors are:
(1) an increase or decrease in the weekly borrowed
reserve target of $100 million causes a rise or fall in the funds rate of 25
basis points, (2) a rise in the discount rate causes an equal rise in the funds
rate, (3) a one percent surcharge raises the funds rate by 65 basis points, and
(4) a decrease in the discount rate has no effect on the funds rate.
The first three assumptions were discussed above.
The fourth reflects the
circumstance that most discount rate cuts in this period occurred when the funds
rate was below the discount rate, and in this situation cuts in the discount
rate would not be expected to affect the funds rate.
This expectation is con-
firmed by Sellon and Seibert [1982], who find that reductions in the discount
rate in this period had a negligible effect on the funds rate.
The Fed seemed
to be aware of the funds rate's insensitivity to discount rate cuts at the time,
as it generally accompanied reductions in the discount rate with announcements
indicating the reductions were solely to realign the discount rate with market
rates.
In contrast, the Fed always accompanied increases in the discount rate
(Footnote Continued)
prevent the funds rate from rising in reaction to the rapid money growth in
August and September, and the expected funds rate remained around 10 percent
throughout the period. (See Table 26 in Appendix A.)
- 18 -
with more aggressive announcements indicating the increases were being made
partially, if not totally, for policy reasons.17
The totals at the bottom of Table III show that based on the assumptions
above, the automatic adjustment in the borrowed reserve target contributed 22.02
percentage points to movements (in absolute value) in the funds rate over the
post-October 1979 period.
The contribution of the discount rate plus the
surcharge was 14.81 percentage points.
Judgmental adjustments in the borrowed
reserve target caused movements of 9.83 percentage points.18
In all but three
cases the judgmental adjustments were in the same direction as the automatic
19
Target changes at FOMC meetings contributed funds rate movements
adjustment.
Cook and Hahn [1986] provide a record of the discount rate announcements
by
in this period. Seven of the ten cuts in the discount rate were accompanied
announcements indicating the cuts were being taken solely to realign the rate
with market rates, whereas none of the six increases in the discount rate were
accompanied by this type of announcement.
1 7
18In the intermeeting period ending February 6, 1980, the weekly borrowed
reserve target fell even though the average borrowed reserve target rose. As
shown in Appendix A, this oddity resulted from large misses in the weekly
borrowed
target. In this case, I set the contribution of changes in the average
reserve target to movements in the funds rate at zero.
As shown in Appendix A, in the intermeeting period ending February 4,
1981, there was a small decrease in the average borrowed reserve target and a
in the
much larger decrease in the weekly target, while the automatic adjustment
in
average borrowed reserve target was negative and the judgmental adjustment
the
situation,
this
In
positive.
was
the average borrowed reserve target
estimated impact on the funds rate of both the automatic and judgmental
adjustments to the borrowing target were magnified given the nature of the
estimation procedure as described in the text. These estimates are offsetting,
however, and they have virtually no effect on the overall estimate of movements
in the funds rate due to automatic versus judgmental adjustments in the average
borrowed reserve target.
19
-
19
-
six
of 8.06 percentage points, the major part of which was in the first
intermeeting periods.2 0
After that, the FOMC generally set the initial
previous
borrowing target close to the last weekly borrowing target in the
period.
The estimates in Table III can also be used to evaluate the relative imporin the
tance of different factors over periods of unusually sharp movements
funds rate.
Consider the rise in the funds rate of 10.98 percentage points over
the four periods ending December 17, 1980.
In this period the estimated in-
points
crease in the funds rate was 8.79 percentage points, only 2.91 percentage
of which was due to the automatic adjustment.
Rises in the discount rate and
and
surcharge were responsible for 4.95 percentage points of the increase,
for
judgmental adjustments in the borrowed reserve target were responsible
2
another 1.33 percentage points. 1
The accompanying chart-compares the funds rate predicted by the estimates
in Table III to the actual funds rate.
Although there are occasionally large
predicted
errors within individual periods, these tend to be offsetting, so the
funds rate does a fairly good job of tracking the actual funds rate.
The large
prediction errors in some of the periods reflect the instability of the
the
relationship between the demand for borrowed reserves and the spread between
for
The sum of the estimated contributions to movements in the funds rate
factors
because
movement
all the factors is bigger than the total estimated
sometimes pulled the funds rate in opposite directions within a period.
20
This estimate is similar to that made in the New York Federal Reserve
Bank's 1980 review of monetary policy and open market operations [1981,
p. 64]: "In combination [the discount rate and surcharge] appeared to account
over
for about half of the 10 1/2 percentage point increase in the funds rate
automatic
the
the August/December period. The remaining increase reflected
response of rates to monetary overshoots under the reserve approach and the
downward [judgmental] adjustments made to the nonborrowed reserve path."
2 1
(
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- 20 -
funds rate and the discount rate.
Factors influencing this relationship are the
expected direction of monetary policy and the effect of discount window
22
administration on bank borrowing patterns.
The discussion above excludes the intermeeting periods ending July 9, 1980,
August 13, 1980, and August 25, 1982, when the funds rate was below the discount
rate and the automatic adjustment was not in operation. 3
(It includes,
however, the intermeeting period ending December 23, 1981, when the funds rate
was below the discount rate for a brief period, and the intermeeting period
ending May 21, 1980, when the funds rate was below the discount rate the second
half of the period.)
The funds rate declined 1.86 percentage points over the
two intermeeting periods in the summer of 1980 and 5.77 percentage .points in the
period ending in August 1982.
The central conclusion from Table III is that movements in the funds rate
in the post-October 1979 period were not determined primarily by the automatic
adjustment of the borrowing target under the nonborrowed reserve operating
procedures.
In this period the automatic adjustment was responsible for only
Levin and Meek (1981, pp. 29-34] discuss some specific periods of
difficulty in predicting short-run movements in the funds rate when policy
expectations and discount window administration were altering the relationship
between borrowing and the spread between the funds rate and the discount rate.
Goodfriend [1983] provides a theoretical discussion of the effect of policy
expectations and discount window administration on discount window borrowing
behavior, and Mengle [1986] describes the ground rules faced by financial
institutions when borrowing at the discount window.
22
In the period ending August 25, 1982, borrowing was well above the
negligible level usually associated with a negative spread between the funds
rate and the discount rate. Apparently, this resulted from the inclusion of
some emergency borrowing in the adjustment borrowing category in the aftermath
of the Penn Square Bank failure. For instance, in explaining the low funds rate
the week of July 28, 1982, when reported adjustment borrowing was $524 million,
the Report of Open Market Operations indicated that "the amount of adjustment
borrowing contained in the total borrowing imposed on the system was fairly low,
resulting in less pressure on the money market."
2 3
- 21
about one-third of the movement in the funds rate.
The other two-thirds
resulted from changes in the discount rate and the surcharge, judgmental
FOMC
adjustments in the borrowed reserve target in the intermeeting period or at
meetings, and movements in the funds rate when it was below the discount rate
and the automatic adjustment was not in operation.
It follows from this
conclusion that the greater volatility in interest rates and monetary growth
rates observed in this period can not be attributed primarily to the automatic
adjustment.
III.
POSSIBLE METHODOLOGICAL PROBLEMS
This section discusses four questions that might arise regarding the
procedure used in allocating movements in the funds rate to the various factors
listed above.
The main concern is whether the procedure might be biased in
were
favor of the conclusion that movements in the funds rate over this period
largely due to judgmental decisions by the Federal Reserve.
One judgmental decision potentially affecting the funds rate not taken into
account in the analysis of the preceding section is how much of the "technical"
adjustments the Desk incorporated into the paths for nonborrowed and total
It is of course possible that in this period the Fed's actions affecting
money stock
the funds rate gave greater weight than earlier to deviations of the
from target or to deviations from target of other goals such as inflation.
from
McNees [1986] estimates a Federal Reserve reaction function over the period
federal
the
with
1986
of
quarter
second
the third quarter of 1970 through the
He
funds rate as the dependent variable (i.e. the Fed's policy instrument).
to
1979
October
from
period
the
over
finds increased emphasis on monetary growth
in
prevailed
that
behavior
policy
the
October 1982, but otherwise concludes that
(19881
Lombra
and
Karamouzis
the 1970s persisted in the 1980s. Similarly,
rate
estimate a Fed reaction function over the 1973-1982 period with the funds
difference
the
on
as the dependent variable. They find that the coefficient
between actual and targeted money growth jumped sharply shortly after October
1979 and then fell sharply toward the end of 1982.
2 4
- 22 -
reserves.
As noted earlier, in setting the total reserve path at the beginning
of an intermeeting period the Desk had to allow for the absorption of reserves
by excess reserves and by required reserves against deposits such as large CDs
not included in Ml and M2.
Estimates of these technical factors would change as
the intermeeting period progressed.
In practice, the Desk used some judgement
in deciding how to adjust the total (and nonborrowed) reserve path to reflect
changes in the technical factors.
This decision influenced the gap between the
projected and path levels of total reserves, and consequently affected the
borrowed reserve target and the expected federal funds rate in the current week.
The Desk on occasion considered the effects on the weekly borrowing target and
funds rate in deciding how much of the technical adjustments to include in the
paths.25
A second question regarding the procedure used to allocate funds rate
movements concerns the treatment of the judgmental adjustments to the average
borrowed reserve target.
two types:
Conceptually, one can divide these adjustments into
The first to engineer movements in the funds rate that would not
have resulted from the automatic adjustment and the second to prevent funds rate
movements
resulting from "shifts" in the demand function for borrowed reserves.
To illustrate the latter type, suppose that in the first week of a four-week
period a temporary (i.e. one-week) shift in the demand for borrowed reserves
increased desired discount-window borrowing above the amount that normally would
have resulted from the prevailing spread between the funds rate and the discount
Suppose also that rather than let this shift affect the funds rate, the
rate.
For example, see Table 10, note 4, and Table 22, note 7, in Appendix A.
See Levin and Meek [1981, Appendix 1] for a discussion of the technical
adjustments in setting the reserve paths.
2 5
- 23 -
had been
Desk allowed borrowed reserves to be, say, $400 million more than
targeted (and nonborrowed reserves $400 million less).
The following week the
by $100
Desk could raise the average borrowing target for the four-week period
weeks in
million (400/4), thereby leaving the weekly target for the last three
function
the period unaffected by the temporary shift in the borrowed reserve
the first week.2
to
One might argue that adjustments in the average borrowed reserve target
from
accommodate past misses in the weekly borrowed reserve target resulting
-shifts in the borrowed reserve function should not be counted as judgmental
were intended
as they were in the preceding section -- because such adjustments
to. prevent movements in the funds rate not resulting from the automatic
adjustment.
In many cases, however, it is difficult to identify from the Report
reserve
of Open Market Operations those adjustments in the average borrowed
target made to offset past misses in the weekly borrowing target clearly
resulting from shifts in the borrowed reserve function.
At most, 30 percent of
of this
the judgmental adjustments at the end of the intermeeting periods were
nature.27
then
If these adjustments were removed from the judgmental category,
there was a
additions to this category should be made for those occasions when
but
shift in the borrowed reserve function that the Desk did not accommodate,
Operations.
such occasions can not be identified from the Report of Open Market
of
On balance, it is possible that the inclusion in the judgmental category
function
those adjustments made to accommodate shifts in the borrowed reserve
For examples of this type of adjustment in the average borrowed reserve
target see Table 6, note 2, and Table 16, note 10, in Appendix A.
2 6
to
Note that it is only the end-of-period adjustments that are relevant
since the
this discussion and the previous discussion on technical adjustments,
estimates in Table III are based on end-of-period figures.
2 7
- 24 -
may have biased upward the estimate in the previous section of funds rate
movements due to judgmental actions, but the bias in any case was small.
The third question regarding the procedure used here is its focus on the
extent to which movements in the funds rate were automatically caused by
deviations of Ml from its short-run targets.
Because the short-run targets were
not
taken as given, a potential source of judgmental influence on the funds rate
captured by the analysis was the relationship between the short-run targets for
Ml and the annual targets.
I did not examine that relationship in this paper,
but it clearly was not uniform over the three-year period.
An important example
is the second quarter of 1981 when the FOMC formally accepted short-run growth
rates of M1 that were below the rate consistent with its annual target (adjusted
for the estimated impact of NOW account shifts).
The funds rate rose from 14.93
percent at the end of the April 1, 1981 intermeeting period to 19.93 percent at
the end of the July 8, 1981 intermeeting period even though Ml was at the lower
bound or below its annual target range throughout this interval.
As a result,
Ml finished 1981 well below its annual target range. (M2, however, finished the
year around the top of its range.)
A final issue, and probably the most important, is that the analysis
implicitly assumes that movements in the funds rate resulting from judgmental
actions were not systematically related to movements resulting from the
automatic adjustment.
If they were, then one might justifiably argue that
movements in the funds rate over this period were, in fact, automatically
determined.
To consider this possibility, I regressed the period by period
changes in the funds rate resulting from all judgmental actions (JUDG) --
the
See Table 16 in Appendix A and the discussion of this period in Hetzel
[1986, pp. 26-281 and Broaddus and Goodfriend [1984, pp. 7-8].
2 8
- 25 -
sum of columns 1, 3, 4 and 5 in Table 3 -automatic adjustment (AUTO) --
on the changes resulting from the
The regression results were
column 2 in Table 3.
(t-statistics in parentheses):
JUDG = 0.54 + 0.55 (AUTO)
(1.74) (2.30)
R
2
=
.22
The coefficient of AUTO is positive and significant at the 5% level, indicating
there was some tendency for judgmental actions to reinforce the effect of the
automatic adjustment on movements in the funds rate.
The low R2, however,
indicates that the proportion of the judgmental movement in the funds rate that
was systematically linked to the automatic adjustment was small.
Moreover, this
regression excludes data from the intermeeting periods when the automatic
adjustment in the borrowed reserve target was not functioning and movements in
the funds rate were determined solely on a judgmental basis (July 9, 1980,
29
On balance, the evidence indicates
August 13, 1980, and August 25, 1982).
only a weak link between movements in the funds rate resulting from judgmental
actions and movements resulting from the automatic adjustment.
To summarize, it can be argued that some of the adjustments in the average
borrowed reserve target that I have counted as judgmental were consistent with
the automatic adjustment because they were intended to accommodate past misses
in the weekly borrowing target associated with shifts in the borrowed reserve
function.
(Although that argument is not compelling in my view, because there
was no clear rule governing when such adjustments would be made.)
Also, the
evidence indicates that a small part of the movement in the funds rate due to
The regression also excludes the period ending February 4, 1981, when
there are large estimates -- opposite in sign -- of the contribution to funds
rate movements of the automatic and judgmental adjustments in the average
borrowed reserve target. (See footnote 19). The regression results deteriorate
sharply when this period is included.
2 9
- 26 -
judgmental actions was systematically related to the movement resulting from the
automatic adjustment.
These f&ctors may exert some downward bias on the
estimate of the proportion of the movement in the funds rate in the post-October
1979 period resulting from the automatic adjustment.
Working in the opposite
direction, however, is the judgmental effect on the funds rate resulting from
the lack of rules (1) specifying how much of the technical adjustments to
incorporate into the reserve paths and (2) linking the short-run MI targets to
the annual target.
On balance, the questions raised in this section do not
appear to significantly weaken the earlier conclusion that movements in the
funds rate from October 1979 to October 1982 were largely determined on a
judgmental basis.
- 27 -
REFERENCES
Akilrod, Stephen H. "U.S. Monetary Policy in Recent Years: An Overview."
Federal Reserve Bulletin 71 (January 1985): 14-24.
Broaddus, Alfred, and Timothy Cook. "The Relationship between the Discount
Rate and the Federal Funds Rate under the Federal Reserve's
Post-October 6, 1979 Operating Procedure." Federal Reserve Bank of
Richmond Economic Review 69 (January/February 1983): 12-15.
Broaddus, Alfred, and Marvin Goodfriend. "Base Drift and the Longer Run
Growth of Ml: Experience from a Decade of Monetary Targeting."
Federal Reserve of Richmond Economic Review 70 (November/December
1984): 3-14.
Cook, Timothy, and Thomas Hahn. "The Information Content of Discount Rate
Announcements and Their Effect on Market Interest Rates." Working
Paper 86-5. Federal Reserve Bank of Richmond, September 1986.
Evans, Paul. "The Effects on Output of Money Growth and Interest Rate
Volatility in the United States." Journal of Political Economy 92
(April 1984): 204-22.
Federal Reserve Bank of New York. "Monetary Policy and Open Market
Operations in 1979." Federal Reserve Bank of New York Quarterly
Review 5 (Summer 1980): 50.
Federal Reserve Bank of New York. "Monetary Policy and Open Market
Operations in 1980." Federal Reserve Bank of New York Quarterly
Review 6 (Summer 1981): 56.
Federal Reserve Bank of New York. "Monetary Policy and Open Market
Operations in 1981." Federal Reserve Bank of New York Quarterly
Review 7 (Spring 1982): 34.
Federal Reserve Bank of New York. "Monetary Policy and Open Market
Operations in 1982." Federal Reserve Bank of New York Quarterly
Review 8 (Spring 1983): 37.
Goodfriend, Marvin. "Discount Window Borrowing, Monetary Policy, and the
Post October 6, 1979 Federal Reserve Operating Procedure." Journal of
Monetary Economics 12 (September 1983): 343-56.
Goodfriend, Marvin, Gary Anderson, Anil Kashyap, George Moore, and Richard
Porter. "A Weekly Rational Expectations Model of the Nonborrowed
Reserve Operating Procedure." Federal Reserve Bank of Richmond
Economic Review 72 (January/February 1986): 11-28.
Hetzel, Robert L. "Monetary Policy in the Early 1980s." Federal Reserve
Bank of Richmond Economic Review 72 (March/April 1986): 20-32.
Hetzel, Robert L. "The October 1979 Regime of Monetary Control and the
Behavior of the Money Supply in 1980." Journal of Money, Credit, and
Banking 14 (May 1982): 234-51.
- 28 -
An
Karamouzis, Nicholas, and Raymond Lombra. "Federal Reserve Policymaking:
the
at
presented
Overview and Analysis of the Policy Process." Paper
Carnegie-Rochester Public Policy Conference, April 22-23, 1988.
Levin, Fred J., and Paul Meek. "Implementing the New Operating Procedures:
In New Monetary Control Procedures,
The View from the Trading Desk."
Board of Governors of the
Washington:
edited by Stephen H. Axilrod.
Federal Reserve System, 1981.
McNees, Stephen K. "Modeling the Fed: A Forward-Looking Monetary Policy
Reaction Function." Federal Reserve Bank of Boston New England Economic
Review (November/December 1986), pp. 3-8.
Mengle, David L. "The Discount Window." In Instruments of the Money
Market, 6th ed., edited by Timothy Q. Cook and Timothy D. Rowe.
Richmond: Federal Reserve Bank of Richmond, 1986.
Morris, Frank E. "Monetarism without Money." Federal Reserve Bank of Boston
New England Economic Review, (March/April 1983), pp. 5-9.
Poole, William. "Federal Reserve Operating Procedures: A Survey and
Evaluation of the Historical Record Since October 1979." Journal of
Money, Credit, and Banking 14 (November 1982, pt. 2): 575-96.
Sellon, Gordon H. Jr. "Estimation of the Borrowings Function: Pre and
Post-October 1979," Research Working Paper 85-04. Federal Reserve
Bank of Kansas City, July 1985.
Sellon, Gordon H. Jr., and Diane Seibert. "The Discount Rate: Experience
under Reserve Targeting." Federal Reserve Bank of Kansas City
Economic Review 67 (September/October 1982): 3-18.
Spindt, Paul A., and Vefa Tarhan.
Procedures: A Post Mortem."
(January 1987): 107-23.
Stigum, Marcia.
1983.
The Money Market.
"The Federal Reserve's New Operating
Journal of Monetary Economics 19
Homewood, Illinois:
Dow Jones-Irwin,
Volcker, Paul A. "The New Federal Reserve Technical Procedures for
Controlling Money." Appendix to a statement by Paul A. Volcker,
Chairman of the Board of Governors of the Federal Reserve System,
before the Joint Economic Committee, February 1, 1980.
APPENDIX A
The tables in this Appendix provide a record of the timing of weekly
changes in the borrowed reserve target and the discount rate for each of the
twenty-six periods between FOMC meetings from October 1979 through October 1982.
All information in the tables comes from the Report of Open Market Operations.
The first two columns in the Appendix tables show the paths set by the
Federal Open Market Committee (FOMC) for the short-run growth rates of the
monetary aggregates and the latest projected monthly growth rates for the
aggregates. All figures in these columns are seasonally adjusted annualized
growth rates.
The paths for the short-run money growth rates were set for
periods of two to four months.
Initially, targets were set for Ml and M2.
From
the intermeeting period ending 19-Mar-80 through the intermeeting period ending
17-Dec-80 targets were set for for MlA, MIB, and M2.
Beginning in the
intermeeting period ending 4-Feb-81 the targets were "shift-adjusted" to abstract from the effects of deposit shifts connected with the introduction of NOW
accounts on a nationwide basis.
M1A was dropped from the list of targeted
aggregates in the intermeeting period ending 20-May-81.
Beginning in the
intermeeting period ending 3-Feb-82 the targets were set without any adjustment
for NOW account shifts, and thereafter M1B was referred to as Ml.
The projections of the monthly growth rates of the monetary aggregates
shown in the Appendix tables are those made by the staff of the Board of Governors.
If projections for a particular month were supplied by the New York staff
but not the Board staff, then the New York staff's forecasts are shown in the
tables.
All forecasts of monthly growth rates available from the Report of Open
Market Operations are reported in the tables.
The third through eighth columns in the tables show targeted and actual
borrowing levels at the discount window.
millions.
All figures in these columns are in
The third column shows the initial target for average borrowed
reserves in the intermeeting period set by the FOMC.
In Federal Reserve de-
scriptions of the October 1979 procedure this was called the "borrowed reserve
assumption." The fourth column shows the gap between the projected level of
average total reserves and the path level of average total reserves.
The
initial average borrowed reserve target was revised by the amount of this gap.
The fifth column shows any additional -average borrowed reserve target.
i.e. judgmental --
adjustments to the
The sixth column adds to the initial
target for average borrowed reserves the total reserve gap plus any judgmental
adjustments to get a revised target for average borrowed reserves.
The seventh
in
column shows the borrowed reserve target for the current and remaining weeks
the intermeeting period (or subperiod).
This column is derived from the revised
in the
average target for borrowed reserves and the actual level of borrowing
weeks of the period that have already gone by.
Column eight shows the actual
borrowing level for the week.
In the first few intermeeting periods the Report of Open Market Operations
to
gives some of the reserve numbers in approximate terms (for example, rounded
the nearest $100 million).
In these periods there are a few small incon-
sistences between the revised average borrowed reserve target and the borrowed
reserve target for the current and remaining weeks.
In some cases --
especially in the first few intermeeting periods --
of Open
numbers for some of the items are not explicitly mentioned in the Report
Market Operations.
The borrowed reserve target for the current and remaining
weeks in the intermeeting period and the gap between the projected and path
to
levels of total reserves are always given, however, and these can be used
derive the other numbers.
Knowledge of the borrowing target for the current and
remaining weeks in the intermeeting period along with past levels of borrowing
can be used to derive the revised target for average borrowed reserves.
The
target for average borrowed reserves in combination with the total reserve gap
and the initial borrowed reserve target specified by the FOMC can be used to
derive a figure for judgmental adjustments in the average borrowed reserve
target.
Numbers that are not explicitly given in the Report of Open Market
Operations, but were derived by me, are denoted in brackets [
1.
The ninth and tenth columns show the average effective federal funds rate
range expected by the Desk near the beginning of the statement week (usually on
Friday) and the actual average effective funds rate.
The last column shows the
discount rate and the surcharge.
Unless in brackets [ ], the explanatory notes at the bottom of the tables
are verbatim quotes from the Report of Open Market Operations.
I included as
notes all explanations given in the Report for judgmental adjustments in the
borrowed reserve target and all explanations for decisions to miss the current
week's borrowed reserve target.
Occasionally, I also included notes reporting
the amount of the "technical" adjustments that were made to the total and
nonborrowed reserve paths.
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APPENDIX B
This Appendix arranges in compact form the data from Appendix A for
the targeted and actual levels of borrowed reserves, the expected and actual
funds rate, and the discount rate.
The first through sixth columns in the table
show targeted and actual borrowing levels at the discount window.
in these columns are in millions.
All figures
The first column shows the initial target set
by the FOMC for average borrowed reserves in the intermeeting period.
The
second column shows the gap between the projected and path levels of average
total reserves.
The third column shows any judgmental adjustments in the
average borrowed reserve target.
The fourth column adds to the initial target
for average borrowed reserves the total reserve gap plus any judgemental
adjustments to obtain a revised target for average borrowed reserves.
The fifth
column shows the borrowed reserve target for the current and remaining weeks in
the intermeeting period (or subperiod).
Column six shows the actual borrowing
level for the week.
The seventh column in the table shows the midpoint of the federal funds
rate range expected by the Desk near the beginning of the statement week
(usually on Friday), and the eighth column shows the actual weekly average funds
rate.
The seventh column is left blank if there is no clear midpoint to the
expected funds rate range in the Report of Open Market Operations, and the
column has an "na" if there is no discussion of the expected funds rate in the
Report.
The last two columns in the table show the discount rate and surcharge.
In the second subperiod of the intermmeting period ending July 8, 1981, the
borrowed reserve target was lowered from $2100 million to $1800 million in an
FOMC telephone conference.
Rather than treating this as a separate period, I
treat it as a judgmental adjustment in the borrowed reserve target in the middle
of the July 8, 1981 intermeeting period.
In the week of November 28, 1979 there
was $175 million "as of" borrowing that was reclassified as nonborrowed reserves
the week of December 19, 1979.
In the week of January 6, 1982 the borrowed
reserve target was set at $1.0 billion for the current week (the year-end week)
and $465 million for each of the final four weeks in the period.
The borrowing
target was changed in the middle of the weeks of February 25, 1981 and
December 23, 1981 following FOMC meetings.
FUNDS RATE
BORROWED RESERVES
Revised
Average
Judgmental
Target
Adjustments
(A)
"I 1,41
(4(
(3)
Target for
Remaining
Weeks
(5)
Date
Average
Target
1)
(-)
Total
Reserve
Gad
(2
10-Oct-79
17-Oct-79
24-Oct-79
31-Oct-79
1500
1500
1500
1500
0
200
*467
360
0
0
0
122
1500
*1700
*1967
1982
1500
1800
2700
2500
938
1530
2960
3056
07-Nov-79
14-Nov-79
21-Nov-79
1500
1500
1500
0
240
300
0
0
*35
1500
1740
*1835
1500
1650
1720
1928
1857
1865
28-Nov-79
05-Dec-79
12-Oec-79
19-Dec-79
1700
1700
1700
1700
0
100
0
0
0
0
0
-100
1700
*1800
*1700
*1600
1700
1800
1500
1500
26-Oec-79
02-Jan-80
09-Jan-80
1700
1700
1700
-400
-280
-200
-200
- 150
--182
1100
*1270
*1318
16-Jan-80
23-Jan-80
30-Jan-80
06-Feb-80
1000
1000
1000
1000
0
0
- 50
-85
0
0
0
*320
13-Feb-80
20-Feb-80
27-Feb-80
1250
1250
1250
-38
313
541
05-Mar-80
12-Mar-80
19-Mar-80
1250
1250
1250
26-Mar-80
02-Apr-80
09-Apr-80
16-Apr-80
23-Apr-80
Initial
Actual
Borrowing
(6)
Midooint
Expected
Funds Rate
~~~~~(7)
Actual
Funds
Rate
(a)
DISCOUNT RATE
Discount
Rate
(9)
Surcharge
(10)
k..
12.00
13.22
15.14
15.61
11.29
12
12
12
0
0
0
0
13.50
13.50
13.50
13.77
13.30
13.10
12
12
12
0
0
0
2021/1846
1819
1291
1684
13.25
13.25
13.25
13.25
12.46
13.77
13.79
13.90
12
12
12
12
0
0
0
0
1100
1300
1300
1224
1431
732
13.00
13.00
na
13.49
14.04
13.94
12
12
12
0
0
0
1000
1000
*950
*1235
1000
940
694
700
1223
1197
1821
759
13.63
13.91
13.77
13.54
12.80
12
12
12
12
0
0
0
0
0
67
67
1212
1630
-1858
1212
1828
2144
1236
2194
2057
na
13.64
14.87
14.62
12
12.71
13
0
0
0
626
644
724
400
400
*737
2276
-2294
*2711
2276
2187
2187
2508
3439
3001
16.00
16.63
na
16.17
16.45
16.24
13
13
13
0
0
1.29
2750
2750
2750
2750
2750
26
62
- 313
- 295
-432
0
- 150
- 150
- 150
-61
2776
*2662
*2286
-2305
*2257
2776
2663
2170
2108
1700
2660
2262
2386
2276
2555
17.00
17.78
19.39
19.04
18.35
17.56
13
13
13
13
13
3
3
3
3
3
30-Apr-80
07-May-80
14-May-80
21-May-80
1375
1375
1375
1375
-588
-802
-821
-854
0
151
151
151
787
724
*705
-672
787
327
170
0
1916
562
207
99
14.50
13.50
11.00
15.12
12.96
10.85
10.71
13
13
13
13
3
2.57
0
0
28-May-80
04-Jun-80
11-Jun-80
18-Jun-80
100
100
100
100
0
0
-6
0
0
0
0
0
100
100
*94
*100
100
31
0
0
307
105
32
120
na
9.46
10.74
9.68
8.99
13
12
12
11.14
0
0
0
0
25-Jun-80
02-Jul-80
09-Jul-80
100
100
100
0
0
0
0
0
-- 27
100
*100
*73
100
128
100
44
74
17
na
na
na
9.08
9.41
9.26
11
11
11
0
0
0
16-Jul-80
23-Jul-80
30-Jul-80
06-Aug-80
13-Aug-80
75
75
75
75
75
0
0
33
57
159
0
0
0
0
0
75
75
108
132
234
75
64
125
75
93
121
45
343
570
117
na
na
na
na
8.98
8.68
8.98
9.60
8.85
11
11
10.57
10
10
0
0
0
0
0
na
na
na
BORROWED RESERVES
Initial
Date
Average
Target
Total
Reserve
Gap
l
FUNDS RATE
Revised
Target for
Judgmentai
Adjustments
Average
Target
Remaining
Weeks
Actual
Borrowing
Midwoint
Expected
Actual
Funds
Funds Rate
Rate
~~~~~~~~~~~~~~~~~~~~~~~~~~-
20-Aug-80
27-Aug-80
03-Sep-80
10-Sep-80
17-Sep-80
75
75
75
75
75
128
282
362
285
380
0
0
0
150
150
203
357
437
510
605
203
425
534
409
755
83
SOO
1150
537
1213
24-Sep-80
01-ct-80
08-Oct-80
15-Oct-80
22-Oct-80
750
750
750
750
750
382
495
323
442
438
0
0
200
200
200
1132
1245
1273
1392
1388
1132
1210
1036
1228
1328
1384
1873
1248
1107
1203
29-Oct-80
05-Nov-80
12-Nov-80
19-Nov-80
1300
1300
1300
1300
209
201
219
300
0
0
100
150
1509
1501
1619
1750
1509
1521
1579
1615
1440
1878
2067
1979
26-Nov-80
03-Dec-80
10-Dec-80
17-Dec-80
1500
1500
1500
1500
403
341
261
210
0
170
170
170
1903
2011
1931
1880
1903
1960
1766
1629
2215
2142
1786
1505
24-Dec-80
31-Dec-80
07-Jan-81
14-Jan-81
1500
1500
1500
1500
0
- 57
- 177
- 170
0
0
0
0
1500
1443
1323
1330
1500
1374
1008
927
1650
1627
1117
1333
21-Jan-81
28-Jan-81
04-Feb-81
1500
1500
1500
-301
-332
-414
0
0
.280
1199
1168
1366
1199
1150
1100
1205
1793
1201
l1-Feb-81
18-Feb-81
25-Feb-81
25-Feb-81
04-Mar-81
1300
1300
1300
1300
1300
-169
-327
-351
-351
-484
0
0
0
166
'414
1131
973
949
1115
1230
1131
926
769
1100
1020
1113
1145
1642
1642
1299
17.00
11-Mar-81
18-Mar-81
25-Mar-81
01-Apr-81
1300
1300
1300
1300
-481
-472
-349
-402
0
0
0
0
819
828
951
898
819
848
1131
1162
768
774
888
1464
15.00
na
08-Apr-81
15-Apr-81
22-Apr-81
29-Apr-81
1150
1150
1150
1150
0
33
97
-10
0
0
0
0
1150
1183
1247
1140
1150
1282
1480
1667
887
1142
863
2278
06-May-81
13-May-81
20-May-81
1150
1150
1150
552
374
389
250
484
484
1953
2008
2023
1953
1777
1863
27-May-81
03-Jun-81
10-Jun-81
17-Jun-81
2100
2100
2100
2100
0
6
-63
-60
0
206
206
206
2100
2312
2243
2247
24-Jun-81
01-Jul-81
08-Jul-81
2100
2100
2100
-179
- 134
- 164
-300
-132
-132
15-Jul-81
22-Jul-81
29-Jul-81
1500
1500
1500
32
-8
0
05-Aug-81
12-Aug-81
19-Aug-81
1500
1500
1500
26-Aug-81
02-Sep-81
09-Sep-81
16-Sep-81
23-Sep-81
30-Sep-81
07-Oct-81
na
DISCOUNT RATE
Discount
Rate
--
Surcharge
-- ----
9.35
10.03
10.47
10.22
10.64
10
10
10
10
10
0
0
0
0
0
10.85
12.38
12.59
12.64
12.55
10
10.86
11
11
11
0
0
0
0
0
13.63
15.00
13.17
13.99
14.65
15.22
11
11
11
11.43
0
0
0
0.86
17.50
19.50
19.50
17.43
17.72
18.82
19.83
12
12
12.86
13
2
2
2.86
3
19.44
18.45
20.06
19.64
13
13
13
13
3
3
3
3
19.35
18.12
17.19
13
13
13
3
3
3
16.51
15.81
14.96
14.96
15.73
13
13
13
13
13
3
3
3
3
3
15.53
14.13
13.48
14.93
13
13
13
13
3
3
3
3
na
15.43
15.33
15.55
16.28
13
13
13
13
3
3
3
3
2471
1733
1975
na
19.00
19.00
18.91
18.21
18.89
13.29
14
14
3.29
4
4
2100
2108
2048
1902
2923
1954
2207
1895
20.00
18.71
18.40
19.33
19.10
14
14
14
14
4
4
4
4
1621
1834
1804
1621
1599
1372
2305
1735
1868
18.50
19.20
18.84
19.93
14
14
14
4
4
4
0
0
0
1500
1532
1492
1500
1651
1450
1294
1730
1978
18.50
18.00
18.76
19.05
18.54
14
14
14
4
4
4
-155
- 139
- 158
0
-76
- 76
1345
1285
1266
1345
1370
1409
1118
1271
1400
na
na
18.00
18.25
18.29
18.19
14
14
14
4
4
4
1400
1400
1400
1400
- 158
-200
-318
-298
0
'93
-122
191
1242
'1293
'1204
'1293
1242
1200
995
995
1571
1258
1349
1062
na
17.00
16.50
17.41
16.89
16.50
16.09
14
14
14
14
4
4
4
4
1400
1400
1400
-447
-419
-379
0
0
0
953
981
1021
953
912
883
1121
1059
733
16.00
15.50
15.50
15.33
15.00
15.46
14
14
14
3.71
3
3
11.00
11.88
12.00
12.75
na
17.50
17.50
na
15.00
20.00
na
Total
Resetve
a
Gao
DISCOUNT RATE
FUNDS RATE
BORROWED RESERVES
Target for
Revised
Reasining
Average
Judgmental
Week
Tare
Aqustnent zst
-- aro _ol
_
Midpoint
Expected
Funds Rate
Actual
Funds
Rate
na
15.00
14.93
15.32
14.87
14
14
14
2.57
2
2
14.79
14.01
13.17
13.57
13
13
2
2
1.43
12.42
12.48
12.04
12.26
12.43
12.43
13
13
12.14
12
12
12
0
0
0
0
0
0
12.54
12.98
12.42
12.96
13.98
14.77
12
12
12
12
12
12
0
0
0
0
0
0
12
12
12
12
0
0
0
0
n.
Date
Initial
Average
Traget
14-Oct-81
21-Oct-81
28-Oct-81
850
850
850
0
-71
-69
0
0
0
850
779
781
850
825
845
687
811
723
04-Nov-81
11-Nov-81
18-Nov-81
850
850
850
- 144
- 194
-154
0
-56
* - 18
706
600
*678
706
508
400
785
850
435
25-Nov-81
02-Dec-81
09.Dec-81
16-Oec-81
23-Dec-81
23-Dec-81
400
400
400
400
400
400
0
25
53
95
99
99
0
' -42
* - 100
* - 117
- 165
- 195
400
383
353
378
334
304
400
425
453
496
500
350
214
192
493
268
460
460
30-Dec-81
06-Jan-82
13-Jan-82
20-Jan-82
27-Jan-82
03-Feb-82
300
300
300
300
300
300
0
206
324
486
517
614
0
89
89
276
276
*303
300
595
713
1062
1093
1217
300
1000/465
577
1200
1513
1500
710
1261
806
755
2272
1635
10-Feb-82
17-Feb-82
24-Feb-82
03-Mar-82
1500
1500
1500
1500
0
-95
-81
- 116
0
0
0
100
1500
1405
1419
1484
1500
1394
1278
1139
1439
1681
1678
1278
14.50
14.50
14.00
15.19
15.61
13.86
14.07
10-Mar-82
17-Mar-82
24-Mar-82
31-Mar-82
1500
1500
1500
1500
-274
-145
- 171
- 157
0
-21
-80
-80
1226
1334
1249
1263
1226
1398
1346
1405
1141
1163
1343
1329
14.00
14.50
15.00
14.50
14.35
14.89
14.48
14.99
12
12
12
12
0
0
0
0
07-Apr-82
14-Apr-82
21-Apr-82
28-Apr-82
1150
1150
1150
1150
0
88
168
164
0
0
-37
-37
1150
1238
1281
1277
1150
1250
1411
1394
1200
1103
1411
1595
14.00
14.25
15.15
14.68
15.01
14.72
12
12
12
12
0
0
0
0
05-May-82
12-May-82
19-May-82
1150
1150
1150
-23
-44
-35
0
0
-29
1127
1106
1086
1127
1016
1044
1286
928
784
15.53
14.97
14.67
12
12
12
0
0
0
26-May-82
02-Jun-82
09-Jun-82
16-Jun-82
23-Jun-82
30-Jun-82
800
800
800
800
800
800
0
24
13
50
114
99
0
15
30
61
61
60
800
839
843
911
975
959
800
828
812
821
1014
1014
884
916
1189
827
919
1523
13.50
13.50
13.75
14.00
13.70
13.43
13.60
14.24
14.17
14.81
12
12
12
12
12
12
0
0
0
0
0
0
07-Jul-82
14-Ju1-82
21-Jul-82
28-Jul-82
800
800
800
800
0
-84
-97
-83
0
0
-85
-85
800
716
618
632
800
626
500
493
985
488
562
524
13.00
14.47
13.18
12.14
11.02
12
12
11.86
11.50
0
0
0
0
04-Aug-82
11-Aug-82
18-Aug-82
25-Aug-82
800
800
800
800
-208
-255
-252
-231
-100
- 100
-161
- 161
492
445
387
408
492
373
292
307
660
305
360
491
11.00
11.15
10.90
10.11
9.04
11.29
11
10.79
10.50
0
0
0
0
01-Sep-82
08-Sep-82
15-Sep-82
350
350
350
0
36
104
0
0
283
350
386
737
350
384
993
391
828
1213
9.50
10.00
10.15
10.14
10.27
10.07
10
10
0
0
0
22-Sep-82
29-Sep-82
06-Oct-82
350
350
350
294
495
564
0
-248
* -309
644
597
605
644
550
500
691
625
481
10.31
10.12
10.77
10
10
10
0
0
0
T.t
Adutep
Actual
Br~rTowing
__ .
13.75
13.50
na
12.75
14.00
14.50
_
Discount
Rate
Surcharge
@FedFRASER