The Appearance of Open-Mouth Operations in the United States

Abstract: In the late 1980s, before the FOMC began to announce whether or not it had changed its target fed funds rate, it became apparent that changes in the FOMCs target fed funds rate could be effected through open mouth operations alone- that is, without adjustments to reserve supply or the discount rate, not only within the earlier days of a maintenance period but for the maintenance period as a whole. This phenomenon represented a contrast from the Feds experience with interest-rate targeting in the 1970s, when reserve-supply adjustments were needed to effect changes in the target rate. I explain the appearance of open-mouth operations as a consequence of the Federal Reserves longstanding discount-window lending practices together with a decrease after the 1970s in the relative importance of discount borrowing by small banks. Data on discount borrowing by large versus small banks in the 1980s-1990s and the 1970s are clearly consistent with my explanation