Federal Reserve Open Market Operations The Federal Reserve's operating strategy for implementing monetary policy involves interest rate targeting through open market operations. The Federal Reserve does not utilize reserve requirements or the discount rate as part of this strategy. Open market operations involves the buying and selling of securities in the open market, in order to influence reserve balances. By manipulating reserve balances, the Federal Reserve can control the price of reserves in the market. The price of reserves is known as the Federal Funds rate. The Federal Funds rate is the interest rate banks charge each other for lending and/or borrowing reserve balances. This paper will discuss how the Federal Reserve implements a strategy of interest rate targeting through open market operations.
Part I Introduction
The Federal Reserve Bank is the central bank of the United States. In 1913, Congress created the Federal Reserve System to provide stability to the financial and monetary system. The Federal Reserve Bank (from here on, referred to as the "FED") has four main functions. They conduct monetary policy by influencing money supply in the economy, in order to maintain full employment, price stability, and promote economic growth. They regulate and supervise banking institutions to ensure the safety and soundness of the U.S. financial and banking system. The FED also provides financial and banking services to the U.S. Government, the public, and to financial institutions. And lastly, the FED maintains stability in the financial system by reducing systemic risks that may arise in the markets.
The Federal Reserve System is made up of the Board of Governors and twelve regional Federal Reserve banks. The Board of Governors consists of seven members who are appointed by the President of The United States, and must be confirmed by the Senate. All seven governors are members of the Federal Open Market Committe...
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