A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-54

Abstract

This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and better understand how monetary policy was transmitted to banking and financial markets. For the 1920s-30s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate that many studies have used for this purpose. For the 1940s-50s, our series provides new information about the transition away from wartime interest rate pegs culminating in the 1951 Treasury-Federal Reserve Accord.

Introduction

The federal funds rate is the interest rate charged on unsecured, mostly overnight loans of funds held by depository institutions and other entities in accounts at the Federal Reserve System. Since the late 1980s, the Fed has implemented monetary policy primarily by targeting the federal funds rate. The Fed publishes the standard daily-frequency time series for the federal funds rate, which begins in July 1954. However, the federal funds market came into being long before that, in the 1920s. This article introduces a new daily series for the federal funds rate that begins at the earliest possible date, April 1928, and continues to the start of the Fed's series. It is the first published time series of the federal funds rate at any frequency for any period prior to July 1954. Our series spans the 1929 stock market boom and crash; the Great Depression; the years of recovery from the Great Depression during which, it is generally believed, short-term rates were at a zero lower bound; the period of interest rate ceilings imposed during World War II; and the lifting of the ceilings with the Treasury-Federal Reserve Accord of 1951. We believe that our series will prove useful for future research on American financial history, monetary policy, and macroeconomics.  

The federal funds rate series published by the Fed is constructed from reports of federal funds transactions provided to the Fed. Our data come from New York City newspapers that reported on conditions and rates in American money markets. The New York Herald Tribune began regular daily publication of federal funds rate quotes in April 1928, observing that "[M]any students of the day-to-day fluctuations of money rates have turned to the current quotation for Federal Reserve funds as an indicator of the easiness or tightness of money.... [I]t has become a most important rate to be scanned for the information it reveals." The Wall Street Journal began to publish daily federal funds rate quotes in June 1932. Our series relies on reports from both newspapers. 

The appendix describes the construction of our series in detail. In the body of the article we present figures showing weekly average values of our series. We compare the federal funds rate with other money market rates and the Fed discount rate, era by era. To aid interpretation of our series we describe developments in the federal funds market from its origins through the 1950s and point out a few events apparent in our series that have largely escaped the attention of existing literature, including an upward move in the overnight rate off the lower bound in 1937 and a peculiar relationship between the federal funds rate and Treasury bill rates shortly after the end of World War II. We argue that our series is a better measure of the overnight, virtually risk-free interest rate than are other series that have been used for that purpose for pre-1954 periods, such as the stock exchange call loan rate, which has been widely used for the 1920s and early 1930s.