FOMC Launches Revolutionary Interest Rate Setting Mechanism


Staff member
Nov 30, 2008
This is an old April fool post from our blog (discontinued):

While all the progressive Forex trading community was trying to guesstimate the date of the next interest rate increase by the Fed, the FOMC Chairwoman acted in unexpected manner. Yesterday, in her late night speech, Janet Yellen has announced an innovative mechanism of fed funds rate fixing. Its primary objective is to eliminate the traditional lack of consensus when the rate vote is performed during the Federal Open Markets Committee meetings and to exclude completely any external political influence from the process of monetary policy setting.

The new approach is based in cryptographically secure pseudorandom number generation. From now on, on each day at 12:00 AM EST, a number ranging between -1% and 5% will be generated by the cutting-edge algorithm (dubbed FEDRNG and based on widely acclaimed Fortuna PRNG algorithm). The number is then set as the federal funds rate effective on that date. The discount rate and other minor rates are then calculated based on the generated main interest rate.
Janet Yellen Is Telling Us that It Will Work. Probably.

As you can see, the process has some considerable advantages over the traditional decision-through-meeting process:
  • No place for human error, which cannot be avoided in live meetings.
  • Normal distribution of numbers in generated by the algorithm will offer fewer surprises to the market participants.
  • No one will blame the Fed for being biased towards excessively accommodating or too strict policy.
  • Lack of predictability will discourage speculators from creating bubbles.
  • Every day will present an opportunity to Forex traders.
Of course, the disadvantages are pretty evident too:
  • Why the range is so tight? Yellen did mention that “-1% to 5%” is not written in stone. I would consider the range between -10% and 10% far more exciting.
  • Abrupt appreciation of the credit funds may hit the consumers hard. But that is only for a day, so why bother?
  • Can such a rate setting mechanism react adequately to the unforeseen economic developments, like crisis, booms or recessions? We are yet to see that.

If you have any suggestions on how Federal Reserve’s staff could possibly improve the current process of setting the federal funds rate, please feel free to post them below.