The Fed’s Effective Proxy Battle

February 16, 2023 | James Torgerson, Senior Research Analyst

Two-line chart comparing San Francisco Fed Funds Proxy Rate and Effective Fed Funds rate. Chart subtitle: The San Francisco Fed Funds Proxy Rate is materially higher than the effective fed funds rate, indicating broader financial market conditions are tighter than what is reflected by the fed funds rate alone. Chart visual description: Y-axis is labeled “Effective & Proxy Fed Funds Rate” and spans -2% to +8%. X-axis is labeled with Jan-“year” in one-year increments, from Jan-00 to Jan-23. Periods of hiking are shaded in grey. Periods of recession are shaded in light teal. The SF Proxy rate line is in dark blue and effective fed funds rate is in orange. Chart data description: At beginning of charted data, both lines peaked for period shown, with SF at 7.63% in May 2000 and effective fed funds at 6.54% in July 2000. From there, both lines fell in the wake of the Dot-Com Crash, then began to steadily climb in 2004 during a hiking period, peaking around 5% in 2H2006. Both fell sharply during the mid-2007’s Global Financial Crisis, held mostly flat at 0 (or below 0 for the SF rate), up to 2016, then steadily climbed toward 3% in 2019. From a few slight drops, both again fell in 2020’s COVID downturn, up to 2022 when hikes began again. As of January 2023, the SF Proxy Rate is at 6.1% while the effective fed funds rate is 4.3%. Chart source: Bloomberg, Federal Reserve Bank of San Francisco, NBER as of January 31, 2023. End chart description. See disclosures at end of document.

The Federal Reserve’s sharp tightening of interest rates over the last year has made financial market conditions significantly more restrictive. However, financial conditions may be even tighter than generally recognized based on the fed funds rate alone. The San Francisco Federal Reserve Proxy Rate is a measure that uses public and private borrowing rates and spreads to better reflect broader monetary policy. The proxy rate represents the fed funds rate that would typically be associated with current market conditions, assuming financial markets are driven solely by this rate.

As of the end of January, the proxy rate was 6.1%, notably above the effective fed funds rate of 4.3%. The higher proxy rate indicates that broader monetary policy is tighter than what is implied by the fed funds rate alone. The proxy rate also started increasing in November 2021, while the Fed did not begin raising rates until March 2022, showing that broader financial market conditions have actually been tightening for more than a year. With markets extremely sensitive to Federal Reserve policy decisions, but the long-term health of the economy dependent on cooling price pressures, a higher proxy rate may be a hidden positive for markets.

Print PDF > The Fed’s Effective Proxy Battle

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

James Torgerson
Senior Research Analyst

Get to Know James

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content

Line chart showing average option-adjusted spreads (OAS), in basis points, on Bloomberg CCC U.S. High Yield and Bloomberg U.S. Corporate High Yield bonds from December 2025 through October 2026. CCC-rated high yield spreads increased from approximately 600 bps to 1,100 bps, reaching their highest levels in nearly four years, while broader U.S. corporate high yield spreads remained relatively stable, increasing from approximately 260 bps to 330 bps. Source: Bloomberg as of November 6, 2026. For full dataset, please contact marquettemarketing@marquetteassociates.com.

11.09.2026

C’s Get Degrees (of Pain)

The U.S. distressed debt market is showing increasingly pronounced signs of stress. As of this writing, option-adjusted spreads on CCC-rated…

Bar chart comparing October and year-to-date 2026 returns for Korea, Taiwan, Brazil, India, China, and the MSCI Emerging Markets Index. October returns are below zero for most markets, while year-to-date returns range from negative to positive. For full dataset, please contact marquettemarketing@marquetteassociates.com.

11.02.2026

The Haunting of Emerging Markets

Emerging markets faced a challenging October, with the space declining by around 8.3% amid renewed concerns over the sustainability of…

Stacked bar chart showing U.S. private equity deal value by deal size from Q1 2022 through Q2 2026. The y-axis shows percentage of total deal value from 0% to 100%, and the x-axis shows quarters by year. Stacked bar chart showing the percentage of U.S. private equity deal count by deal size from Q1 2022 through Q2 2026. The y-axis ranges from 0% to 100%, and the x-axis shows quarters by year. For full dataset, please contact marquettemarketing@marquetteassociates.com.

10.26.2026

Smaller Deals, Larger Appeal

Private equity activity is increasingly shifting toward smaller transactions, with total deal value for transactions of $100 million or less…

10.08.2026

3Q 2026 Market Insights

This video is a recording of a live webinar held October 22 by Marquette’s research team analyzing the third quarter…

10.22.2026

Will Higher Rates Cramp the Markets?

Anyone who has run a marathon knows the last six miles are brutal — no matter how well the first…

Line chart comparing S&P 500 Index cumulative returns for midterm and non-midterm election years since 1980. The x-axis shows October through December, and the y-axis shows S&P 500 Index cumulative return, ranging from -1% to 8%. For full dataset, please contact marquettemarketing@marquetteassociates.com.

10.19.2026

Divided We Rise?

Since 1980, the S&P 500 Index has generally performed well in the weeks surrounding U.S. midterm elections. Specifically, the index…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >