Open market operations, which consist of purchases and sales of government securities, is the Federal Reserve’s conventional device for exercising monetary policy. Based on the Fed, the term monetary policy refers to the actions taken by a central bank to influence the availability and cost of money and credit and to help promote national economic goals (FederalReserve.gov). These securities transactions help dictate the federal funds rate (rate at which banks lend excess reserves to one another). The fed funds rate is significant to our economy because it somewhat controls the overall financial situation, affecting employment, output, and the overall level of prices.
In 1913, the Federal Reserve Act was passed, giving the Fed authority for setting monetary policy. In 1935, the Federal Open Market Committee (FOMC) was created. They are the board in charge of setting monetary policy for the Fed. THE FOMC implements the policies and also discloses them to the public. The board consists of 12 members that serve one-year terms on a “rotating basis”. They hold 8 scheduled meetings a year, and discuss economic and financial conditions, proper stances of monetary policy, and risk-assessments of things like price stability and sustainable economic growth (FederalReserve.gov).
GOALS of MONETARY POLICY
The two primary goals of monetary policy are to promote sustainable output and employment to the highest capacity and to promote price stability. Although monetary policy cannot affect these two things in the long run, it certainly can help influence them in the short-term. An example of this is interest rates. The Fed can lower interest rates to help raise demand and thus help to momentarily stimulate the economy. The problem with this, though, can be inflation. In the long run, attempting to fuel an economy beyond its capabilities will not help unemployment rates or output, but rather, just create more inflation, hurting economic growth.