Economic Quarterly

This article uses principal component methods to assess the importance of changes in the federal funds rate in driving interest rate changes across a broad array of credit markets. We find that most of the variability in interest rate changes across these markets is explained by a small number of common components. Furthermore, for many of the interest rate series in our sample, changes that reflect common movements are highly correlated with changes in the federal funds rate. However, in some credit markets associated with longer maturities, such as the mortgage market, common movements are less correlated with changes in the federal funds rate. Therefore, interest rate changes in those markets are i) more likely to reflect aggregate disturbances somewhat unrelated to monetary policy, or ii) related to contemporaneous monetary policy more indirectly through changes in expected future short rates. We also find evidence that movements in the auto loan market are almost entirely driven by idiosyncratic considerations rather than changes in the federal funds rate.