Federal Reserve Open Market Operations Essay

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Federal Reserve Open Market Operations

SUMMARY

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
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The FOMC is responsible for making decisions about the conduct of open market operations in order to influence the monetary base.

Part II Monetary Policy

The Federal Reserve Act, signed into law by President Woodrow Wilson in 1913, spelled out the goals of monetary policy. It said that, when conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee should strive "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

The most important of these goals, of today's monetary policy, is price stability. When prices of goods and services rise (inflation), economic growth is slowed down. There is similar reaction to employment levels, as unemployment rates will increase. This also creates uncertainty in the economy, making it difficult for consumers, government, and businesses to make decisions about the future.

The Federal Reserve conducts Monetary Policy by affecting the money supply and interest rates.They have three tools they can use. The first tool is open market operations. Open market operations, is the most prevalent tool used in monetary policy today. Open market operations involves the buying and selling of U.S. government securities by the FED. When the FED buys or sells a security, it changes the amount of reserves. Open market operations will be discussed in further detail, later in this

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