Does the Fed “control” short rates?
This seems to be common wisdom but I have seem some good arguments that it is a myth. The argument I see is a graph showing that movements in the Fed Funds lags the movement in T-Bills. In other words the fed is generally following the market with the exception of a period under Vocker where he was fighting embedded inflation.
It is also interesting that the Fed doesn’t seem to be at all present in Bill auctions at the moment as they have changed the maturity of their holdings.
What do you think Cullen? Is it possible that this is an urban myth.
The Fed has the power to intervene in markets and control rates but the operational reality appears to be that it mostly is operating at the margins and not too heavily influencing market rates.
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