How closely do bank profits follow changes in the federal funds interest
rate (which is closely regulated by the Federal Reserve System)? Draw a sample
of banks from S&P's Market Insight, Educational Version database (such as
Bank of America Corp., Bank One Corp., Bank of New York Co. Inc., Citigroup
Inc., and J. P. Morgan Chase & Co.) and extract from Market Insight, starting
in 2000, their profitability ratios (especially their return on assets [ROA]
and their return on equity capital [ROE]). Extract the effective federal funds
rate over the same period from the Federal Reserve Board's H.15 release at
federalreserve.gov/releases/h15/update/.
What relationship, if any, between bank profits and the federal funds rate
did you find? Should the relationship you found be of concern to the central
bank? Why or why not?
