Evan Soltas
Jun 2, 2012

Mysteries of Monetary Policy

I've been sitting on this post for a while, hoping that I could come up with an adequate explanation for this -- the movement of the federal funds rate within its quarter-percent to zero range, which has been established since the start of 2009.

Perhaps it is merely the by-product of the Fed's QE programs and Operation Twist, but it sure is interesting to try to see if there's something more systematic going on here, given that the Federal Reserve Bank of New York manages the rate within the range by trading from the System Open Market Account. Could it be that the Fed is signaling an easing-tightening bias?

I really have no idea, and given the fact that this is the first time the fed funds rate has been a range, the conduct going on within the range is interesting and worth asking about, worth bringing up. It is so easy to assume the fed funds rate away as somewhere inside the range, but this movement near zero is puzzling.

The only data that looks remotely related is quarterly real GDP growth, mainly because of the rise in 2010 and slowdown in 2011. Inflation doesn't fit the story, nor do equity prices. It doesn't appear to be random, although I suppose it could be a random walk. That seems unlikely, given the behavior of the data set and the involvement of the NY Fed.

Any ideas?