The Implementation of Monetary Policy

 

 

The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks. The operating objectives or targets that it has used to affect desired conditions in this market have varied over the years. At one time the Federal Open Market Committee sought to achieve a specific quantity of balances, but now it sets a target for the interest rate at which those balances are traded between depository institutions. That target rate is called the federal funds rate. By conducting open market operations, imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.

 

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