operations further in this discussion.Part III Strategies for Implementing Monetary Policy Through Open Market OperationsThe FED's operating strategy for implementing monetary policy involves interest rate targeting through open market operations. This means that the FED targets the price of reserves, or the fed funds rate.The challenge that the FED faces, is they wish to accomplish certain goals, such as price stability, full employment, and moderate long-term interest rates (economic growth), but they cannot directly influence those goals. Since monetary policy cannot directly affect the goals they strive for, they must develop a set of targets that affect the long-term goals.After the FED decides it's long-term goals, they choose a set of intermediate targets to aim for. From year to year, the FED gauges the growth of the money supply using money aggregates, or various measures of the money supply, labeled as M1, M2, & M3.Monetary policy tools, however, do not directly affect the money supply. They, therefore, choose another set of targets, which are more responsive to monetary policy tools. The Federal funds rate is monitored on a short-term basis. By targeting the price of reserves (Federal funds rate), the FED manipulates the supply of reserves.This strategy has a domino effect. Each target must be accomplished in order to achieve the final goals of monetary policy. By controlling the Federal funds rate, and keeping it in line with the monetary policy directive, the FED has control over the supply of reserves. This allows them to set targets for the growth of the money supply. By influencing the money supply, they can achieve the long-term goals of monetary policy. If the FED feels they are off track of any target, they can conduct open market operations to make corrections.Part IVMethods of Implementation of Monetary PolicyThe FED conducts monetary policy through open market operations. The Federal Reserve Bank of Ne...
