The term “monetary policy” refers to the actions undertaken by a central bank,
such as the Federal Reserve, to influence the availability and cost of money and credit to help promote
national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for
setting monetary policy.
The Federal Reserve controls the three tools of monetary policy—open market operations, the discount
rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for
the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for
open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply
of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the
federal funds rate. The federal funds rate is the interest rate at which depository institutions lend
balances at the Federal Reserve to other depository institutions overnight.
Changes in the federal funds influenced by the federal Open Market Committee triggers a chain of events
that affect other short-term interest rates, foreign exchange rates, long-term and range of Economic
variables granting all positions/trades made on this special asset a high interest short- term profit