Federal Reserve behavior and interest rates are crucial determinants of the general well-being of the agricultural sector. This report investigates the factors that have influenced Federal Reserve policy and ultimately the level of interest rates. The author develops a partial adjustment model for the Federal funds rate and documents improved forecasting performance in comparison to competing models on an in-sample and out-of-sample basis. The author attributes the improved forecasting performance to the inclusion of international variables, a domestic banking default risk proxy, and slope dummy variables that capture shifts over time in the Federal Reserve's reaction to the unemployment rate and deviations in M1 from target.
