TAILIEUCHUNG - The Benefits of Bank Deposit Rate Ceilings: New Evidence on Bank Rates and Risk in the 1920s (p. 2)

Expectations of Fed policy actions are not directly observable, of course, but Fed funds futures prices are a natural, market-based proxy for those expectations. The market was established in 1989 at the Chicago Board of Trade, and contracts based on one- through five-month Fed funds are currently traded, along with a “spot month” contract based on the current month’s funds rate. Krueger and Kuttner (1996) found that funds rate forecasts based on the futures price are “efficient,” in that the forecast errors are not significantly correlated with other variables known when the contract was priced | Summer 1987 Federal Reserve Bank Quarterly Review The Benefits of Bank Deposit Rate Ceilings New Evidence on Bank Rates and Risk in the 1920s Arthur J. Rolnick Recent Developments in Modeling Financial Intermediation p. 19 Stephen D. Williamson Federal Reserve Bank of Minneapolis Quarterly Review Vol. 11 No. 3 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Produced in the Research Department Edited by Preston J. Miller Kathleen s Rolfe and Inga Velde. Graphic design by Terri Desormey and typesetting by Barbara Birr and Terri Desormey Public Affairs Department. Address questions to the Research Department Federal Reserve Bank Minneapolis Minnesota 55480 telephone 612-340-2341 . Articles may be reprinted it the source is credited and the Research Department is provided with copies of reprints. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Federal Reserve Bank ol Minneapolis Quarterly Review Summer 1987 The Benefits of Bank Deposit Rate Ceilings New Evidence on Bank Rates and Risk in the 1920s Arthur J. Rolnick Senior Vice President and Director of Research Federal Reserve Bank of Minneapolis For most of the last 50 years to promote a safe banking system the . Congress has imposed interest rate ceilings on bank deposits. Federal legislation passed in the wake of the 1930s banking crisis prohibited banks from paying any interest on checking accounts and authorized the Federal Reserve Board of Governors to set upper limits on the rates banks could offer on time and savings accounts. The rationale for these ceilings appeared straightforward. If banks were not allowed to compete for deposits through interest rates they would not be forced to invest in the high-yield high-risk end of their portfolio opportunities. Limiting what banks could pay

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