d. Fed, Interest Rate and Monetary Policy

RUNNING HEAD : Fed , Interest Rate , and Monetary Policy

Fed , Interest Rate and Monetary Policy

Name of Student

Name of Subject Course

Name of Professor

21 March 2009

1 . Introduction

The Federal Reserve System (Fed ) through the Federal Open Market Committee (FOMC ) managers the monetary policy of the US by using interest rate in indirectly controlling inflation and indirectly influencing output and employment (Federal Reserve Bank of San Francisco , 2009a , 2009b . This seeks to explain further this assertion in understanding the how the Fed function in relation to

interest rates , and monetary policy

2 . Analysis and Discussion

2 .1 . How does the Fed use the monetary policy to accomplish its purpose

Monetary policy aims to attain economic objectives by promoting sustainable output in its maximum ' and in promoting stable prices as provided for in the 1977 amendment of the Federal Reserve Act (Federal Reserve Bank of San Francisco , 2009c . Thus , the Fed uses monetary policy tools to indirectly control inflation and indirectly influence output and employment . Fed used accomplish this mainly by raising or lowering short-term interest rate called federal funds ' rate via the open market operations in the market for bank reserves , known as federal funds market . In theory and in practice , US banks and other depository institutions (or banks ) are required to have reserves by the Fed to keep a certain amount of funds in reserved to meet unexpected outflows In practice however , banks normally hold even more than they are required to in to have extra...