Philip Jefferson, Speech: Implementation and Transmission of Monetary Policy

“In conclusion, the Fed has a congressional mandate of maximum employment and price stability. The FOMC conducts monetary policy by setting the target range for the federal funds rate. Then, the Fed uses its monetary policy tools to implement the policy, which guides market interest rates toward the Fed’s desired setting of policy. The Fed implements monetary policy using administered rates. The interest rate on reserve balances is the Fed’s primary tool for adjusting the federal funds rate. The overnight reverse repurchase agreement facility is a supplementary tool that sets a floor for the federal funds rate. The discount rate serves as a ceiling for the federal funds rate. The Fed ensures that the banking system has ample reserves, using open market operations, if needed. Currently, we are tightening monetary policy. Changes in the federal funds rate are transmitted to other interest rates through arbitrage and by affecting investors’ expectations. Changes in interest rates affect the decisions of consumers and businesses with a lag. Their decisions ultimately move the economy toward maximum employment and price stability.”