FUNDS RATE:

I am grateful to Marvin Goodfriend for numerous helpful comments and suggestions on this paper. The views expressed in the paper are mine and do not necessarily represent those of the Federal Reserve Bank of Richmond or the Federal Reserve System. DETERMINANTS OF THE FEDERAL FUNDS RATE: 1979-1982 In the late 1970s the money stock was growing at a faster rate than desired, the rate of inflation was accelerating, and the dollar was steadily depreciating in the foreign exchange markets. In an attempt to reverse these developments the Federal Reserve on October 6, 1979 announced several actions, including a change in its operating procedures to place more emphasis on managing the growth of bank reserves in order to improve monetary control.I The new procedures are generally thought to have remained in place until October 9, 1982, when Federal Reserve Chairman Paul Volcker announced that the Fed was going to temporarily place less emphasis on the money stock (Ml) in its policy decisions. The period between October 1979 and October 1982 was characterized by unusually high and volatile short-term interest rates, volatile money growth rates, and-- towards the end of the period-- a sharp drop in the rate of inflation. Many accounts of this period have attributed these developments to the new procedures. The issue addressed in this paper is how the Fed's operating procedures actually changed in October 1979 and, more specifically, how movements in the federal funds rate were determined.2 Before October 1979, the Federal Open Market Committee (FOMC) at each meeting set an initial target for the funds rate IFor an account of the developments leading up to the change in operatin