September 12 and later, as markets began to function better. Federal Reserve repurchase agreements soared from $25 billion to nearly $100 billion." [Meyer 2001] As previously stated, the FED buys securities when they transact in repurchase agreements. These transactions increased bank reserves by 300%. On September 11, 2001, the Federal funds rate was pegged at 3.5%. Since then, the FOMC has reduced the Federal funds target rate by another 1.75%, to 1.75%, including the most recent cut of 25 basis points on December 10, 2001.We now see that there are many advantages to conducting open market operations. We see that the FED has complete control over the type and volume of open market operations. Open market operations are flexible, precise, and can be implemented immediately, without delay. Since open market operations are flexible, the FED can easily reverse any operation conducted in error. By using open market operations to maintain a targeted cost of Federal funds, the FED has the ability to meet it's operational, intermediate, and long-term goals. Federal funds rate targeting allows the FED to easily adjust reserve balances to make corrections, when certain factors beyond the FED's control, causes reserves to rise and fall. This is evidenced by response of the FED to the tragedy of September 11, 2001.The Federal Reserve, has had so much success in their attempts to control the Federal Funds rate, they hardly need to act. As Meulendyke (1998) observes, "the Federal Funds rate has tended to move to the new preferred level as soon as the banks know the intended rate." Demiralp and Jorda (2001) called this the "announcement effect". By simply publicly announcing the FED's intended rate, the market will adjust toward that rate naturally, thus reducing the need for the FED's intervention.However, the most challenging aspect of open market operations, as it relates to conducting monetary policy, is that information used to mak...
