ABSTRACT
The conventional view is that the Fed controls the federal funds rate by altering the supply of liquidity in the overnight market by changing the supply of reserves relative to demand through openmarket operations (Taylor 2001; Friedman 1999). Openmarket operations are conducted by the Trading Desk of the Federal Reserve Bank of New York (the Desk). While the procedure that the Desk follows has evolved and continues to do so, the fundamental procedure has remained largely the same since at least the mid-to-late 1970s. Specifically, the Desk estimates (a) the demand for reserves that are required to achieve the FOMC’s operating objective and (b) the quantity of reserves that would be available if the Desk did nothing. If (a) exceeds (b), the procedure indicates that reserves be added through an open market purchase of government securities. If (a) is less than (b), the procedure suggests that the Desk drain reserves through an open market sale.
