Motorized Wheel Chair Source

The Fed's role as maker and executer of macroeconomically significant monetary policies for the United States government centers around three major policy tools at the Fed's disposal:

Manipulating the legally required reserve ratios ("reserve requirements") for banks (and, less directly, for some other depository institutions, such as savings and loans and credit unions)

Buying or selling U.S. government debt instruments (Treasury bonds, notes and bills) on the private financial markets in New York ("open market operations")

Setting the interest rate at which the Fed stands ready to make short-term loans to member banks and other depository institutions that would othertwise fall below the required reserve ratios (the Fed's "discount rate").

Using its discretionary power to manipulate these policy tools, the Fed is able to exercise substantial influence (but not complete control) over changes in the size of the money stock and thus over interest rates, thereby influencing overall levels of business activity and employment in the national economy (as well as indirectly influencing the rates at which the dollar is exchanged for foreign currencies and thus the flow of international trade and investment across U.S. borders).

The Fed's Board of Governors sets policies regarding reserve requirements and the discount rate all by itself, but changes in these two policy levers tend to be relatively infrequent (perhaps once or twice a year on average for the discount rate, and perhaps once every five to ten years on average for the reserve requirement). The Fed's main policy tool of choice for exerting its influence on the money stock and interest rates on a week-to-week basis is its "open market operations." The necessary policy decisions about the Fed's on-going open market operations (buying or selling varying quantities of U.S. bonds and other treasury securities on the New York financial markets) are made for the Fed's Board of Governors by a slightly expanded body called the Federal Open Market Committee (FOMC). The FOMC consists of all seven members of the Board of Governors plus five of the 12 banker-elected presidents of the Federal Reserve district banks. (The president of the New York district bank is a permanent member of the FOMC, while the other 11 district bank presidents serve one-year terms on a rotating basis, with only four of them having the right to vote at any given time.) The FOMC meets rather frequently in Washington, DC, but it has also been the practice in recent years for the FOMC membership to convene informally via long-distance telephone conference calls or one-on-one communications with the Fed's Chairman on almost a daily basis.