ABSTRACT
Interest rate increases have focused the public’s attention on the conduct of monetary policy and the role of the Federal Reserve. This chapter reviews the goals of monetary policy and the basic instruments the Fed can use to conduct policy. It discusses the role of intermediate targets, indicators, rules and forecasts in the implementation of monetary policy. In the lobby of the Federal Reserve Bank of San Francisco, visitors are exposed to the difficulties of implementing monetary policy through an electronic video game. The object is to time the release of a dart from a moving arm in order to hit the bull’s-eye of a moving target. One effect of having multiple, conflicting goals is that it leads to political pressures on the Fed, varying in strength and intensity over time, for lower interest rates, for faster growth, or for lower inflation. The link between open market activities and the federal funds rates is fairly straightforward.
