First Krugman then Williamson: What did the Fed do in the 90s?

Take a very close look at the effective rate, caused by the market in inter banks loans; and the target, set by the Fed. The Fed consistently follows the market signals and barely has an effect.  What does Krugman say?

Krugman: The thing is, we’ve been here before. In the early-to-mid 1990s, the Fed generally estimated the Nairu as being between 5.5 percent and 6 percent, and by 1995, unemployment had already fallen to that level. But inflation wasn’t actually rising. So Fed officials made what turned out to be a very good choice: They held their fire, waiting for clear signs of inflationary pressure.

Economists, I have news.  The Fed made three adjustments in the last 40 years.  The Nixon shock, Volker raised reserve requirements, and Bernanke got IOER passed into law.  That is about it, the entire Greenspan era was about following the market. 

Here is the Fed statement about the 90s.In table 3 their treasury holding varied about 10 billion over the year.  During the day they will trade less than a billion, table 4 (in annual purchases, I divide that by 250). This is some 5% of total required balances, done mainly to balance intra day trading which would easily be 5% given the rotation of the earth.

Did this activity make a dent?
No, if they were effective, then why does the market still rise and fall on its own? The only time the market pauses a bit is right after a rate hike.  In 1994 to 1995 the market clearly demanded a great rate than the target.  It was clearly following the one year treasury rate.  If the Fed was effective at all, it was effectinve in slowing the rate hikes, not speeding them up, just the opposite of what Krugman would say.

There is no way the Fed could have raised the overnight rate in 1996 as the market was clearly driven down the one year, buying them. And their reserve requirements had dropped,  from a peak of 35 Billion in 1994 down to 12 billion in 1997.  How could the Fed have raised rates with the one year dropping and the reserve requirements dropping?

The effect of Fed open market operations is a hallucination.