Scott Rothbort
4. How the Fed Achieves Its Monetary Policy
Both the discount rate and fed funds rate are determined by the Federal Reserve System. However, each of those rates is controlled by entirely different financial mechanisms. The discount rate is controlled by the board of directors of each Federal Reserve District Bank and is further overseen by the Fed Board of Governors. These loans are made at a facility called the "discount window." Typically, these loans are made on an overnight basis. What made the Fed's recent move so extraordinary was the fact that the loans were made on a 30-day term basis. The fed funds rate is determined by the FOMC. The FOMC meets eight times each calendar year. At the conclusion of each meeting (which can last as long as two days), the FOMC will issue a press release stating its assessment of the economy and the "target" fed funds rate. In addition, a bias for future FOMC policy will be extracted from the statement. Three weeks after the press release, the FOMC will release more detailed minutes (notes) of the committee's meeting. It is important to note that the FOMC can and will meet from time to time in between meetings to take monetary action as is necessary to achieve its goals. Examples of this behavior include the extraordinary monetary actions that were taken after the 1987 stock market crash and the terrorist attacks of Sept. 11, 2001. It is important to note that the FOMC controls the targeted fed funds rate but not the discount rate. In order to accomplish the FOMC's objectives, the FOMC will enter into "repos" (to tighten or remove liquidity) or "reverse repos" (to ease or increase liquidity). A third way in which the Fed achieves its monetary policy is through setting the "reserve requirement." The reserve requirement is a percentage of liabilities that each depository institution must maintain in cash or on deposit with the Fed to satisfy Fed Regulation D
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