Why do T-bill rates react to discount rate changes?

This paper investigates the hypothesis suggested by Cook and Hahn (1988) that the T-bill rates respond to the announcement of discount rate changes because the market takes discount rate changes to be a signal that the Fed has changed its target for the federal funds rate. Re-Interpreting Cook and Hahn's empirical evidence and using theirs and an alternative methodology, we show that the evidence cannot differentiate their hypothesis from a number of others that have been suggested in the literature. We further find that there is no difference in the relative magnitude or timing of the response during periods when the Fed was directly targeting the funds rate or using a "fuzzy" funds rate target. This result suggests that the market does not simply interpret discount rate changes as a signal that the Fed has changed its target for the funds rate.