Policy rate is Fed’s most powerful monetary tool, says paper

Researcher tests impact of changes in short-term rate, forward guidance and asset purchases

US Federal Reserve interior
Photo: Flickr/US government/Britt Leckman

The federal funds rate is the most powerful tool in the Federal Reserve’s monetary policy toolkit, new research finds.

In the working paper, Eric Swanson tests the policy rate against two other tools employed by the Fed – forward guidance and large-scale asset purchases (LSAPs). Swanson picks out changes in the individual tools based on their impact on short-, medium- and long-term rates.

The author focuses not only on monetary policy decisions but also speeches, testimony, minutes and other

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