When Did the FOMC Begin Targeting the Federal Funds Rate? What the Verbatim Transcripts Tell Us

In October 1982 the FOMC deemphasized M1 and moved to what is commonly referred to as a borrowed reserves operating procedure. Sometime thereafter the FOMC switched to a funds rate targeting procedure but never formally announced the change. Given the close correspondence between a borrowed reserves operating procedure and a funds rate targeting procedure, Thornton (1988) suggested that the FOMC went immediately to a funds rate targeting procedure. Others date the switch to the funds rate procedure later. Meulendyke (1998) suggests the switch came in late 1987, while others suggest the change occurred later. This paper reviews the verbatim transcripts of the FOMC meetings to establish the timing of the switch. The verbatim transcripts suggest that the FOMC effectively switched to a funds rate targeting procedure in 1982. The documentary evidence is supported by an analysis of the spread between the funds rate and the funds rate target, which suggests that the differences in the behavior of the spread before October 1979 and after October 1982 are relatively small and economically unimportant.