The Impact of New Economic Information on the Volatility Of Short-Term Interest Rates

Abstract

The sharp rise in the volatility of interest rates since late 1979 is widely recognized. One factor contributing to the increase in volatility may have been the Federal Reserve's change in its monetary-control procedures on October 6, 1979. Until then, the Federal Reserve focused on the control of short-term interest rates in an effort to achieve monetary growth objectives. Since late 1979, however, it has focused on the availability of reserves to financial institutions.' As a consequence, short-term interest rates have been allowed to vary over a wider range than they were before. It is not surprising, then, that short-run movements in interest rates have been more pronounced. A previous article in this Review examined the effect of the change in the Federal Reserve's operating procedures on interest-rate

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