Working Paper: NBER ID: w29762
Authors: Eric T. Swanson
Abstract: This chapter provides an overview of the federal funds market and how the equilibrium federal fund rate is determined. I devote particular attention to comparing and contrasting the federal funds market before and after 2008, since there were several dramatic changes around that time that completely changed the market and the way in which the equilibrium federal funds rate is determined. The size of this structural break is arguably as large and important as the period of reserves targeting under Fed Chairman Paul Volcker from 1979–82. Finally, I discuss the relationship between the federal funds rate and other short-term interest rates in the U.S. and the outlook for the federal funds market going forward.
Keywords: Federal funds market; Equilibrium federal funds rate; Monetary policy
JEL Codes: E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crisis of 2007-09 (G01) | changes in equilibrium federal funds rate (E52) |
| unconventional monetary policies (E49) | changes in equilibrium federal funds rate (E52) |
| financial crisis of 2007-09 (G01) | new equilibrium determined by different factors (D59) |
| federal reserve's open market operations (E52) | supply of federal funds (E50) |
| supply of federal funds (E50) | equilibrium federal funds rate (E43) |
| demand for federal funds loans (E50) | equilibrium federal funds rate (E43) |
| liquidity needs (E41) | demand for federal funds loans (E50) |
| market volatility (G17) | demand for federal funds loans (E50) |
| federal funds rate (E52) | serves as a floor for other short-term interest rates (E43) |