EXPECTATIONS AND THE MONETARY POLICY The connection between the federal funds rate, the Federal Reserve’s primary monetary policy tool, and the market interest rates that slow or stimulate spending, is a complex relationship. How does control over a relatively insignificant interest rate influence the full spectrum of short-term and long-term market rates? Gordon Sellon, Jr., vice president and economist at the Federal Reserve Bank of Kansas City, explains the connection in “Expectations and the Monetary Policy Transmission Mechanism.” The article is featured in the fourth quarter edition of The Economic Review. Sellon uses a simple analytical framework to provide insight into the relationship between monetary policy and market interest rates. In this framework, financial market expectations about the future path of monetary policy are the driving force behind the behavior of market interest rates. Understanding how financial markets determine the policy path and what factors cause the path to change is critical to understanding the behavior of interest rates. The framework also highlights the important role central bank communications play in the transmission mechanism and the evolution of market interest rates. Sellon’s article, as well as the full issue of The Economic Review and additional research from the Federal Reserve Bank of Kansas City, is available on the Bank’s web site at www.kansascityfed.org. ### Return to www.kansascityfed.org
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