Question

In December 2008, the Fed switched from a point federal funds target to a range target (and it’s possible that it will switch back to a point target in the future). Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds targets/ ranges (DFEDTAR, DFEDTARU, DFEDTARL) and the effective federal funds rate (DFF). Download into a spreadsheet the data from the beginning of 2006 through the most current data available.

a. What is the current federal funds target/ range, and how does it compare to the effective federal funds rate?

b. When was the last time the Fed missed its target or was outside the target range? By how much did it miss?

c. For each daily observation, calculate the “miss” by taking the absolute value of the difference between the effective federal funds rate and the target (use the abs(.) function). For the periods in which the rate was a range, calculate the absolute value of the “miss” as the amount by which the effective federal funds rate was above or below the range. What was the average daily miss between the beginning of 2006 and the end of 2007? What was the average daily miss between the beginning of 2008 and December 15, 2008? What is the average daily miss for the period from December 16, 2008, to the most current date available? Since 2006, what was the largest single daily miss? Comment on the Fed’s ability to control the federal funds rate during these three periods.

Short answer

a. As the current period target of federal ranges from $0\%$to $0.25\%$. On the present period, the effective federal funds rates were within the targeted range, that is $0.09\%$.

b. When the Fed changed its target from $1\%$to $0.25\%$on December $15,2008$; this was the time when it missed the target. Federal fund rate at that point was below the target of $1\%$, that is. $0.18\%$. This target miss represents the 82 basis points miss.

c. Data is not available.

Step-by-step solution

Concept Introduction 

The interest rates charged by the banks from other banks in exchange for the overnight loans that are borrowed to fulfil the reserve requirements are thought of because of the effective federal funds rate.

Explanation of Solution (Part a) 

As the current period target of federal ranges from $0\%$ to $0.25\%$. On the present period, the effective federal funds rates were within the targeted range, that is, $0.09\%$.

Explanation of Solution (Part b) 

When the Fed changed its target from $1\%$ to $0.25\%$on December $15,2008$; this was the time when it missed the target. Federal fund rate at that point was below the target of $1\%$, that is. $0.18\%$. This target miss represents the 82 basis points miss.

Explanation of Solution (Part c) 

Data is not available.