-term loans, with another - creates a situation of uncertainty for businesses and consumers, greatly complicating long-term planning. In addition, high inflation distorts the meaning of economic decisions, leading to an arbitrary increase or decrease in the rate of profit after tax in the various sectors of the economy. , Ensuring price stability is one of the main goals of the Fed. While monetary policy cannot make the economy grow faster than capacity allows long-term growth, or reduce the level of unemployment in the long term, but it can stabilize prices across longer time periods. the Fed can influence the average rate of inflation in the economy, some experts and some members of Congress, emphasized the need to define the objectives of monetary policy in the task of maintaining price stability. However, fluctuations in levels of output and employment is also costing the public dearly. In practice, the Fed, like any central bank has to control not only inflation but also about economic growth in the short term.main objectives pursued by the Fed tend to contradict each other. One of the contradictions arise when deciding on what the purpose is of paramount importance at a time. For example, suppose that during a recession the Fed takes measures to prevent the excessive rise in unemployment. Short-term success in this area could result in long-term problems if the monetary policy for too long will be aimed at stimulating employment, since it would lead to higher inflationary pressures. Therefore, it is very important for the Fed to find a balance between short-term stabilization and long-term objective for low inflation. Fed controls the rate of inflation or influence output and employment levels through changes in the cost of short-term loans. Impact on the level of interest rates is carried out mainly through open market operations and the federal funds rate, both these methods work in the market of bank reserves, also called the federal funds market. accordance with the law, banks and other depository institutions (for brevity, they are all in this material are referred to as "Bank") to create specific funds that can be used to meet unexpected cash outflows. These funds are in cash held in banks 'vaults or as deposits at the Fed. Currently, banks are obliged to keep from 3% to 10% of funds held in interest-bearing and interest bearing checking accounts as reserves, depending on the total dollar amount available on such accounts in each bank. In addition, banks can generate additional reserves required for settlements as "overnight" and other payments. in need of additional short-term reserves can borrow them from other banks, which currently have excess reserves. Such loans are made on the so-called federal funds market and interest rates on short-term loans is determined by the federal funds rate, which is the "target". Manipulation of the rate and change in reserves leads to a corresponding adjustment of interest ra...
