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Market vs. administered Federal Reserve policy rates

David Walker (McDonough School of Business, Georgetown University, Washington, DC, USA)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 28 October 2014




The purpose of this study is to contrast the discount and the Fed funds rates since 1990 and the variables that influence these rates. On the basis of quarterly data, since 1990, the primary determinants of the two policy rates are: the rate of inflation, the unemployment rate and rates on US Treasury securities, i.


Ordinary least squares models are developed with autocorrelation removed.


12 per cent level in the Fed funds market rate models. The statistical significance of the coefficient of the spread between long-term and short-term Treasury rates is a projection of a recession one year in the future. The statistical significance of the coefficients for unemployment, one and two quarter the autocorrelation coefficients, adjusted R-square values and Durbin-Watson statistics are similar for the two policy rate models.

Research limitations/implications

The major limitation is that monthly data are not available for further tests.

Practical implications

The two Fed policy rates respond differently to the impacts of inflation, unemployment and yield curve tilts.

Social implications

Expected recessions, reflected by the yield curve are not often anticipated.


The approach and results have a different perspective from the work in most studies involving Federal Reserve policy rates.



The author would like to acknowledge the recommendation of an anonymous reviewer for the journal to clarify difference between the Fed funds market and target rates.


Walker, D. (2014), "Market vs. administered Federal Reserve policy rates", Journal of Financial Economic Policy, Vol. 6 No. 4, pp. 331-341.



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