Open Market Operations of the Federal Reserve SUMMARY The Federal Reserve's operational strategy for implementing monetary policy involves achieving the interest rate through open market operations. The Federal Reserve does not use reserve requirements or the discount rate as part of this strategy. Open market operations involve the buying and selling of securities on 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 to lend and/or borrow reserve balances. This paper will discuss how the Federal Reserve implements an interest rate targeting strategy through open market operations.Part I IntroductionThe Federal Reserve Bank is the central bank of the United States. In 1913, Congress created the Federal Reserve System to provide stability to the financial and monetary system. The Federal Reserve Bank (hereinafter referred to as the "FED") has four primary functions. They conduct monetary policy by influencing the money supply in the economy, in order to maintain full employment, price stability and promote economic growth. They regulate and supervise banking institutions to ensure the safety and soundness of the U.S. financial and banking system. The Fed also provides financial and banking services to the U.S. government, the public, and financial institutions. Finally, the FED maintains the stability of the financial system by reducing systemic risks that may arise in the markets. The Federal Reserve System is composed of the Board of Governors and twelve regional Federal Reserve Banks. The Board of Governors consists of seven members appointed by the President of the United States and must be confirmed by the Senate. All seven governors are members of the Federal Open Market Committee (FOMC), and each votes on the conduct of open market operations. The network of twelve regional banks performs various functions, including; operates a nationwide payments system, distributes currency and coins, supervises and regulates member banks, and serves as a banker for the U.S. Treasury. The Federal Open Market Committee (FOMC) is an important part of the Federal Reserve...... middle of document... Trends: Funds Rate Target and Interest Rates - September 1999. http://www.stls. frb.org/docs/publications/mt/1999/cover9.pdf - 12-13- 99· The diminishing power of rate cuts.http://www.nytimes.com/2001/10/03/opinion/03wed1. htmlOctober 3, 2001.· Another rate cut by the Fed.http://www.nytimes. com/2001/12/12/opinion/12wed2.htmlDecember 12, 2001. · Hess, Diane. 2001. Fed paints real rates a deeper shade of red.http://www.thestreet.com/markets/taleofthetape/10005186.htmlDecember 11, 2001. · Task, Aaron L., 2001. Cutting Spree May Dull Fed's Blade.http ://www.thestreet.com/markets/aarontaskfree/10003583.htmlNovember 6, 2001. Speeches: · Meyer, Laurence H., 2001. Remarks by Governor Laurence H. Meyer. In front of the National Association of Business Economics. The Federal Reserve Board. November 27, 2001. · Greenspan, Alan. 2001. Testimony of Chairman Alan Greenspan. Before the Joint Economic Committee, United States Congress. The Federal Reserve Board. October 17, 2001. · Greenspan, Alan; 2001. Testimony of Chairman Alan Greenspan. Before the Committee on Financial Services, United States House of Representatives. The Federal Reserve Board. July 18, 2001.