Monetary Policy
The term "monetary policy"
refers to the actions undertaken by a central bank, such as the Federal
Reserve, to influence the availability and cost of money and credit
to help promote national economic goals. The Federal Reserve Act of
1913 gave the Federal Reserve responsibility for setting monetary
policy.
The Federal Reserve controls the three
tools of monetary policy--open market operations, the discount rate,
and reserve requirements. The Board of Governors of the Federal Reserve
System is responsible for the discount rate and reserve requirements,
and the Federal Open Market Committee is responsible for open market
operations. Using the three tools, the Federal Reserve influences
the demand for, and supply of, balances that depository institutions
hold at Federal Reserve Banks and in this way alters the federal funds
rate. The federal funds rate is the interest rate at which depository
institutions lend balances at the Federal Reserve to other depository
institutions overnight.
Changes in the federal funds rate trigger
a chain of events that affect other short-term interest rates, foreign
exchange rates, long-term interest rates, the amount of money and
credit, and, ultimately, a range of
economic variables, including employment, output, and prices of goods
and services.
Structure of the FOMC
The Federal Open Market Committee (FOMC)
consists of twelve members--the seven members of the Board of Governors
of the Federal Reserve System; the president of the Federal Reserve
Bank of New York; and four of the remaining eleven Reserve Bank presidents,
who serve one-year terms on a rotating basis. The rotating seats are
filled from the following four groups of Banks, one Bank president
from each group: Boston, Philadelphia, and Richmond; Cleveland and
Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City,
and San Francisco. Nonvoting Reserve Bank presidents attend the meetings
of the Committee, participate in the discussions, and contribute to
the Committee's assessment of the economy and policy options.
The FOMC holds eight regularly scheduled
meetings per year. At these meetings, the Committee reviews economic
and financial conditions, determines the appropriate stance of monetary
policy, and assesses the risks to its long-run goals of price stability
and sustainable economic growth.
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