Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

The way we operate, Dino is asked to supply reserves against two different demand curves—a maintenance period demand curve and a daily demand curve. And there’s a yield curve relationship within a maintenance period that ties the daily rates together. To ask him to make the funds rate do this step function I think is asking a lot. That would be asking him to disrupt markets to some extent on a day-to-day basis, pushing against the fear of overdraft and the fear of lock-in on the part of banks. That doesn’t seem to make sense to me either. To Vincent’s point, the fed funds futures market builds in an expectation of this step function. What we’re asking Dino to do is not to fight against that. We’re not asking him to tip our hand; we’re asking him to go along with what the yield curve says about what the rate is going to do after the meeting. I don’t see that as prejudicing the Committee’s discretion.

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