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1 – 10 of over 11000Previous literature for the relations between the market interest rates and the targeted or target rate of the Federal Reserve paid little attention to Eurodollar market rates…
Abstract
Purpose
Previous literature for the relations between the market interest rates and the targeted or target rate of the Federal Reserve paid little attention to Eurodollar market rates. The present paper attempts to fill this void.
Design/methodology/approach
The study investigates the dynamic relationship between the federal funds rate and three short‐term Eurodollar deposits rates. Cointegration analysis is utilized to examine the long‐run relationships between the short‐run dynamics of the market and targeted rates through a vector error‐correction mechanism.
Findings
The study shows strong evidence that, while the Eurodollar rates and the federal funds rate move together over time regardless of procedural differences in targeting, how they co‐move, especially how they adjust toward long‐run equilibrium, appears to be related to the targeting procedural changes.
Research limitations/implications
Further research should be conducted for the theoretical analysis of strategic interactions between the monetary authority and market participants in the domestic and external financial markets.
Practical implications
The result suggests that the Fed may affect the market interest rates through a policy of changing the federal funds rate target by a “fixed” amount for the foreseeable future. Such a policy has improved the market's ability to predict the size and timing of the changes in the target rate.
Originality/value
The results of the paper give some new insights into the interactions between monetary policy operations and market interest rates, which is of interest to researchers, monetary authorities, and financial market participants.
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Violeta Diaz, Harikumar Sankaran and Subramanian Rama Iyer
After a seven-year period of being stuck in the zero lower bound (ZLB) range, the target rate was raised by 25 basis points on December 16, 2015. Prior to the rate hike, the…
Abstract
Purpose
After a seven-year period of being stuck in the zero lower bound (ZLB) range, the target rate was raised by 25 basis points on December 16, 2015. Prior to the rate hike, the important issues that the Federal Reserve dealt with were the magnitude, timing, and the information conveyed by a first-time rate hike from the ZLB period. The purpose of this paper is to use the data from the ZLB period and simulate the impact of an increase in the proxies for the federal funds rate: effective federal funds rate and shadow rate, and measure the impact on the resulting changes in credit default swap (CDS) spreads across 11 industries. Increases in both proxies predict a significant decrease in CDS spreads which is indicative of an economic recovery. This prediction is confirmed by the announcement effect of the actual rate increase on December 16, 2015 and the three subsequent rate increases.
Design/methodology/approach
In the absence of target rate changes in the ZLB environment, the authors use a recursive vector autoregressive (VAR) model to simulate the rate increases in proxies for target federal rate and predict the impact on the economy by observing the reaction in CDS spreads and stock returns across 11 industries.
Findings
The impulse response indicates that an increase of one standard deviation in the effective rate (approximately 25 basis points) results in a statistically significant decrease in the spreads of CDS contracts in 8 of the 11 sectors studied in this research. Similar results obtain for an increase in shadow rate thus providing a robustness check. These results suggest a rate increase from the ZLB period and the resulting dynamics captured in the VAR system is indicative of an economic recovery.
Originality/value
Prior studies have used the event study methodology to evaluate the impact of rate changes on credit spreads. The ZLB environment does not contain data on target rate changes and renders the event study methodology as ineffective. This paper is the first to simulate the implications of a first-time rate increase from the ZLB environment in the context of a recursive VAR model. The results are very helpful to the Federal Reserve of countries experiencing a ZLB environment such as Japan and Europe.
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Jeff Madura and Oliver Schnusenberg
Outlines previous research on the impact of US Federal Reserve policies on market interest rates and returns; and the relationship between interest rates and market returns…
Abstract
Outlines previous research on the impact of US Federal Reserve policies on market interest rates and returns; and the relationship between interest rates and market returns. Investigates these effects over three time periods: Sept 1974‐Oct 1979 (interest rate targeting through the federal funds rate), Oct 1979‐Aug 1987 (reserves targeting using the discount rate) and Aug 1987‐Jan 1996 (interest rate targeting again); using four mathematical models. Discusses the results, which suggest that changes in the relevant federal policy tool have a significant negative effect on equity returns, especially during the first two periods and when the change reverses previous change. Concludes that announcements of changes in policy contain valuable information not already included in share prices.
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This study aims to address the fundamental question on how the major players in the economy dynamically interact with each other: among the central bank, the investors in the bond…
Abstract
Purpose
This study aims to address the fundamental question on how the major players in the economy dynamically interact with each other: among the central bank, the investors in the bond market and the firms and consumers that contribute to the economic growth, who gets information from whom, when and why?
Design/methodology/approach
To answer “who follows whom,” the authors apply a novel technique to examine the lead–lag relations between three time series, the federal funds rate, the treasury yield curve and the gross domestic product (GDP). To investigate “when and why,” the authors combine the lead–lag relations with principal component analysis to cluster economic states that are similar with respect to the eight macroeconomic variables.
Findings
The authors show that during the period 1977–2019, the bond market potentially obtained information from the federal funds rate (61% of the time) and less often (34% of time) from the changes in the GDP. Meanwhile, the funds rate decision by the Federal Reserve seems to lead the economic growth about 63% of the time. The analysis also suggests that the bond market obtained information directly from GDP when unemployment and inflation was high. In addition, the authors find that the federal funds rate was leading the GDP when the GDP deviated from the target value, consistent with the Federal Reserve’s policy of boosting and damping the economy when the GDP growth is low or high, respectively.
Originality/value
This study provides insights into the fundamental questions that have important implications for empirical work on the monetary policy, financial stability and economic activities.
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Trung Hoang Bao and Cesario Mateus
The purpose of this paper is to examine the impact of Federal Open Market Committee (FOMC) announcements, which includes information about the targeted Federal fund rate and…
Abstract
Purpose
The purpose of this paper is to examine the impact of Federal Open Market Committee (FOMC) announcements, which includes information about the targeted Federal fund rate and revision to the future path of monetary policy on Southeast Asian stock market performance.
Design/methodology/approach
This paper has used a sample of five national equity market indexes over the period 1997-2013 that covers 132 scheduled FOMC meetings. The authors have developed the model of Wongswan (2009) and Kontonikas et al. (2013) to quantify target surprise and path surprise.
Findings
The results first show that all the stock markets examined do respond to information in FOMC announcements. Second, the target Federal fund rate has more impact on Southeast Asian stocks performance than information about the future path of monetary policy does. Third, different Southeast Asian equity markets respond similarly to targeting the Federal fund rate, while the responses to monetary policy differ from each other. Fourth, the response of each country to the FOMC announcement is not statistically different in the two periods of financial crisis.
Research limitations/implications
Southeast Asian financial markets are increasingly highly correlated to the US market. The main channel in which FOMC announcement has impact on Southeast Asian stock markets is through US price transmission. This is the case of foreign firms borrowing from the US market. Then, an increase in interest rate, which means that the cost of financing increases, will lower firm equity value.
Originality/value
The understanding of the response of the Southeast Asian stock markets to target surprise and path surprise, and the impact of each surprise in different time periods, would be important to investors and encourage further discussion amongst academics in Southeast Asia, where stock markets have been emerging in recent years.
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The time series of the federal funds rate has recently been extended back to 1928, now including several episodes during which interest rates remained near the lower bound of…
Abstract
The time series of the federal funds rate has recently been extended back to 1928, now including several episodes during which interest rates remained near the lower bound of zero. This series is analyzed, using the method of indirect inference, by applying recent research on bounded time series to estimate a set of bounded parametric diffusion models. This combination uncouples the specification of the bounds from the law of motion. Although Louis Bachelier was the first to use arithmetic Brownian motion to model financial time series, he has often been criticized for this proposal, since the process can take on negative values. Most researchers favor processes such as geometric Brownian motion (GBM), which remains positive. Under this framework, Bachelier's proposal remains valid when specified with bounds and is shown to compare favorably when modeling the federal funds rate.
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Suk-Joong Kim, Linda Lee and Eliza Wu
This chapter investigates the impact of policy interest rate news from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) on stock returns and volatilities of U.S…
Abstract
This chapter investigates the impact of policy interest rate news from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) on stock returns and volatilities of U.S. NYSE and German DAX listed commercial banks. We find that Fed news has the most influence on both U.S. and German listed bank stocks and an unexpected policy rate increase (decrease) lowers (raises) returns and raises volatility in the majority of cases. On the other hand, ECB news generally increases bank stock volatility in the United States but has little impact within its own domestic banking industry. While our results for the U.S. listed banks confirm that their stock prices are more responsive in bad economic times and also during periods of monetary tightening, we find disparities for German banks suggesting that U.S. and European banking industries respond heterogeneously to monetary policy news but the Global Financial Crisis increased the sensitivity of all banks to monetary policy news.
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Albulena Basha, Wendong Zhang and Chad Hart
This paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland…
Abstract
Purpose
This paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.
Design/methodology/approach
The authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.
Findings
The authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.
Originality/value
This paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.
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Arvind Krishnamurthy and Taft Foster
This case presents financial and macroeconomic data for the United States between 2007 and 2013, a period covering the financial crisis and Great Recession of 2007–2009 and the…
Abstract
This case presents financial and macroeconomic data for the United States between 2007 and 2013, a period covering the financial crisis and Great Recession of 2007–2009 and the slow economic recovery from 2009 onward. During this period, the Federal Reserve had set the federal funds rate, its primary monetary policy instrument, near zero and was using additional monetary policy tools to stimulate the economy. One of these additional tools was quantitative easing (QE).
Students will use the data provided in the case to examine how financial markets reacted to QE actions by the Federal Reserve and to analyze the potential impact of QE on the macroeconomy.
After reading and analyzing the case, students will be able to:
Apply the event study methodology to analyze economic effects
Recognize how macroeconomic news affects the prices of financial securities
Describe the connections between the prices of financial securities and the macroeconomy
• Debate the relative costs and benefits of quantitative easing and the optimality of Federal Reserve policy
Apply the event study methodology to analyze economic effects
Recognize how macroeconomic news affects the prices of financial securities
Describe the connections between the prices of financial securities and the macroeconomy
• Debate the relative costs and benefits of quantitative easing and the optimality of Federal Reserve policy
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Marcel Aloy and Gilles Dufrénot
This chapter proposes a comparative analysis of the monetary policies undertaken by the Federal Reserve Board and the European Central Bank after the 2008 subprime crisis. We…
Abstract
This chapter proposes a comparative analysis of the monetary policies undertaken by the Federal Reserve Board and the European Central Bank after the 2008 subprime crisis. We point out the twin nature of the financial crises in Europe in comparison with the US crises: in addition to the role of bank funding, the euro area countries have also experienced a structural problem of balance of payment disequilibria. This explains why in the early stages of the subprime crisis, the Fed has succeeded in tackling the illiquidity problems facing the banking sector, while the ECB did not. The Fed could then focus on tackling the recession in the real sector by adopting quantitative easing policies to exert downward pressure on the long-term interest-rate. In the euro area quantitative easing policies came later, in 2013. Even the forward guidance policies have been different between the two central banks. Unlike the ECB, the Fed has gone through diverse forward guidance policies: qualitative, calendar-based, and state-contingent. The chapter proposes a new survey of the monetary policies after the subprime crisis by comparing two strategies in different contexts: the United States and the euro area.
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