Why the Federal Reserve Sets Rates at Meetings Instead of Continuously

# Why can't/doesn't the Fed adjust the federal funds interest rate continuously?


# Why can't/doesn't the Fed adjust the federal funds interest rate continuously?












Maybe the question I'm asking doesn't make sense-- but this is something I've wondered about since I learned about the Fed in high school.

The media typically talks about Fed interest rate changes as discrete "hikes", as if the rate instantly changes.

The graph in this article (from NPR) depicts the rate changes as discrete (i.e. discontinuous). But this graph (included below) depicts the rate as continuous.

Obviously the actual rate changes aren't continuous if you zoom in enough, but how discontinuous are they? And why wouldn't the Fed prefer continuous adjustments?

By announcing significant rate changes ahead of time, it seems like the Fed is just creating a short-lived information arbitrage opportunity for more-liquid traders that are set up to exploit it. Am I off-track or is this the right way to think about it?

## Answer by Brumder (score 2, accepted)

https://quant.stackexchange.com/a/32069

The Fed (under the Yellen regime) has always stated that any adjustments to the Federal Funds rate are "data dependent." These data points (CPI inflation, inflation expectations, non-farm payrolls, GDP, et cetera) are only available on a monthly or quarterly basis, (depending on the print) which would cause them to have to make an uninformed decision if the FOMC met more frequently than the current 6 weeks.

Remember that the Fed has the dual-mandate of moderating inflation and maintaining maximum employment. Both of these goals require economic data that is simply not available on a daily basis. Even if it were, given the Fed's long-term horizon, reacting on a daily, weekly or monthly basis would likely to cause them to become too speculative. Moving this quickly would also be self-defeating, as CEOs/market participants would likely begin to base their opinions on the Fed's actions, creating a circular issue. When viewed from this perspective, the ability to adjust rates every month and a half is quite sufficient from a reactionary standpoint, especially when adjustments can be made in any magnitude deemed necessary (something oft-forgotten since the financial crisis).

As far as the ability for arbitrageurs to profit off announced rate changes, it's important to take into account how far in advance the Yellen regime has announced their expected hikes. During the two hikes since the financial crisis, the expectation was announced at the prior FOMC meeting; the resultant decision barring any unforeseen shocks or degradation of economic data. This caused a hike to be largely priced-in both times, limiting any major profits (and eliminating any risk-free ones). The volatility in equity and fixed income markets directly following an announcement is also quite high, meaning even the most-liquid traders will still need to endure a degree of speculation.