Handout: Monetary Policy

In an introduction to monetary policy, the San Francisco Fed has a neat FAQs-style description on its website. For instance, in answering the question “What are open market operations?” they say (amongst other things):

Suppose the Fed wants the funds rate to fall. To do this, it buys government securities from a bank. The Fed then pays for the securities by increasing that bank’s reserves. As a result, the bank now has more reserves than it wants. So the bank can lend these unwanted reserves to another bank in the federal funds market. Thus, the Fed’s open market purchase increases the supply of reserves to the banking system, and the federal funds rate falls. [link]

This question gets closest to what we were discussing in class. But there are a bunch of other things that are of interest too. Like, for instance, in answer to the question: “What about foreign currency operations?”

Purchases and sales of foreign currency by the Fed are directed by the FOMC, acting in cooperation with the Treasury, which has overall responsibility for these operations. The Fed does not have targets, or desired levels, for the exchange rate. Instead, the Fed gets involved to counter disorderly movements in foreign exchange markets, such as speculative movements that may disrupt the efficient functioning of these markets or of financial markets in general. For example, during some periods of disorderly declines in the dollar, the Fed has purchased dollars (sold foreign currency) to absorb some of the selling pressure. [link]

The handout is uploaded with the others from the semester. The same information can be found on the SF Fed’s website too, by clicking on the links above.

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