Operational problems and aggregate uncertainty in the federal funds market

This paper uses operational problems at commercial banks in sending Fedwire payments as a proxy for aggregate uncertainty in end-of-day Fed account positions and then examines funds market behavior on those days. The results suggest that increased uncertainty is associated with a deviation of the federal funds rate from the FOMC’s target rate, the magnitude depending on the severity of the difficulty, the payment volume of the affected participant, and the time of day. Moreover, discount window borrowing picks up on days with operational difficulties. These effects are generally transitory, and markets revert back to previous levels the next day. ∗ Mail Stop 59, Board of Governors of the Federal Reserve System, 20 and C Streets NW, Washington, DC, 20551. Tel: (202) 721-4501, Email: [email protected]. The views expressed are those of the author and not of the Board of Governors, other members of its staff or the Federal Reserve System. I thank Seth Carpenter, Jim Clouse, Doug Conover, Bill Nelson and Will Roberds for helpful comments and suggestions, and Jonathan Crane and Kristen Payne for excellent research assistance.