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CRS-3
availability and cost of money and credit. In general, the long-term goal of monetary policy is to ensure that money and credit grow sufficiently to encourage non-inflationary economic expansion. When economic problems arise, such as the prospect of an economic downturn, attention can quickly focus on the Fed's policy decisions.' The Federal Open Market Committee (FOMC) is the policy making body for open market operations - the principal means through which monetary policy is conducted. The seven board members plus five of the 12 Federal Reserve Bank presidents make up the FOMC. The president of the Federal Reserve Bank of New York is a permanent member because the New York Bank executes the Fed's monetary policy decisions through open market operations. The remaining four seats are filled by the other 11 presidents on a rotating basis for one-year terms. All of the presidents participate in the FOMC meetings and contribute their views but only the five members vote. The committee elects a chairman and vice chairman. Traditionally, the chairman of the Board of Governors is elected chairman and the New York Bank's president is elected vice chairman. Open market operations involve the purchase and sale of government securities in the secondary market by the Federal Reserve. Payments for purchases of securities by the Federal Reserve increase the money supply and this tends to ease credit conditions. When securities are sold by the Federal Reserve the money supply is decreased and credit conditions are tightened. The Federal Reserve System's portfolio is composed of U.S. Treasury securities, federal agency securities, and bankers acceptances. The Federal Reserve Bank of New York holds the portfolio and through its trading desk conducts open market operations pursuant to directives of the FOMC. Two less often used monetary policy instruments may be employed by the Federal Reserve--legal reserve requirements and the discount window. Depository financial institutions are required by law to set aside reserves in certain proportions against demand deposits. What is held in reserve affects the availability of loanable funds. An increase in the requirement would mean banks and thrifts would have less money to lend and would tend to restrain the money supply. Alternatively, lowering the requirement would increase the proportion of deposits that could be lent and would tend to expand the money supply. Reserve requirements are rarely changed because as a monetary policy tool they are considered too blunt an instrument. The discount window is the Federal Reserve facility for lending to eligible depository institutions. An institution may borrow funds for short periods from a Federal Reserve
Bank to augment its reserve balances for interbank transactions. The discount rate is the interest rate charged for this short-term loan. The rate is set by each Bank subject to approval by the Board of Governors; over time, it has become common practice for the rate to be uniform for all 12 Reserve Banks. A higher rate discourages borrowing and in turn lending by banks and thrifts. The operations of the discount window are not as efficient as open market operations. Currently, the discount window serves mainly as a complement to open market operations.
For more information on monetary policy, see CRS Report RL30354, Monetary Policy: Current Policy and Conditions, by Gail Makinen.
