The effect of changes in the federal funds rate target on market interest rates in the 1970s

Abstract

This paper examines the influence of monetary policy on interest rates by estimating the effect of changes in the federal funds rate target — the Federal Reserve's policy instrument — on market interest rates in the 1970s. We find that changes in the target caused large movements in short-term rates and smaller but significant movements in intermediate- and long-term rates. We hypothesize that the similarity of the reactions of three-, six-, and twelve-month rates to changes in the target offers a possible explanation for the lack of support for the expectations theory from studies that have tested the theory using these rates.