The Federal Reserve & Interest Rates: It's the Interest on Reserves, Not the Fed Funds Rate That Matters

Abstract

Much of the press’s reporting of the Federal Reserve’s efforts to fight inflation is measured by how much the Federal Reserve will raise interest rates at its next FOMC meeting. But the press’s measure of interest rates is in terms of the Federal Reserve’s upper bound target for the Fed Funds rate, not about the Fed Funds rate itself or any interest rate for that matter. Here, Thomas Saving shows that market interest rates are not influenced by Federal Reserve decisions about its upper Fed Funds rate target. Rather, the Federal Reserve’s so-called ‘interest rate increases’ have followed significant increases in market interest rates, not led these market interest rate changes. The mechanisms that do cause an increase in market interest rates and affect the price level are also explored.