Setting the target for the federal funds rate: the determinants of Fed behaviour

Randall Kesselring and Dale Bremmer

Applied Economics, 2011, vol. 43, issue 11, 1341-1349

Abstract: This article analyses the factors the Federal Open Market Committee (FOMC) considers in setting the target for the federal funds rate. The sample consists of 262 FOMC meetings between 1983 and 2005. Statistical results indicate that the Fed's target is inversely related to the unemployment rate and directly related to several measures of expected inflation. Technical factors such as the number of days since the last target change, the size and direction of the previous target change and the gap between the actual federal funds rate and its targeted value were also statistically significant explanatory variables. Estimations were performed using Ordinary Least Squares (OLS), censored regression and two types of ordered probit; but the results proved to be robust regardless of the statistical technique used.

Date: 2011
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DOI: 10.1080/00036840802600459

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