Estimating the Open Market Desk's Daily Reaction Function

This paper presents the results of an empirical investigation into the proximate determinants of the Federal Reserve's daily open market operations. Using information available each morning at the Fed conference call, the author models the Open Market Desk's choice of both the quantity and the type of operation, using a friction model for the former and a multinomial logit framework for the latter. Different types of operations are shown to send different signals to the market about the underlying thrust of Fed policy and open market operations in recent years are shown to have become increasingly keyed to the federal funds rate.