Knowledge of actual Federal Reserve behavior is important in studies of monetary policy and financial markets for at least two reasons. First, the interpretation of variables chosen to represent the monetary policy process may be marred if they do not correspond to variables actually used by the Federal Reserve to implement monetary policy or to gauge its performance. Accordingly, the Federal Reserve's choices regarding targets, intermediate targets,-and instruments may play a key role in research design. Unfortunately, information regarding these choices is not always easy to obtain. Relevant Federal Reserve policy statements, such as an FOMC policy directive, are released after substantial delays and often are ambiguous. Thus, additional knowledge regarding actual Federal Reserve behavior may have a methodological payoff.

Second, the recurrent issue of policy credibility requires an assessment of the extent to which Federal Reserve statements find a reflection in the beliefs and behavior of economic agents. Although credibility potentially has a variety of interpretations, all would seem to require that a shift in stated policy objectives and instruments be associated with at least some change in market behavior. Thus, additional knowledge regarding Federal Reserve behavior, and the financial market's reaction to it, may help illuminate the credibility issue.

This chapter examines actual Federal Reserve behavior from a financial-market perspective. Movements in interest rates are used as the metric in this exercise. The underlying presumption is that financialmarket participants fully understand Federal Reserve behavior. This position is sensible for two reasons. First, many financial-market participants are former Federal Reserve officials and economists.