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The Federal Reserve Board has the power to influence the money supply with the purchase and sale of government securities. This is known as open-market operations and is specified by the Federal Open Market Committee (FOMC). The fed funds rate is the rate of interest that bank members charge each other for overnight loans to meet reserve requirements. A target level is explicitly announced by FOMC for the fed funds rate. The fed funds rate is determined by the actions of FOMC based on the goals for monetary policy. The fed funds rate is lowered when the economy is contracting or growing too slowly. Alternately, the fed funds rate will be raised when consumer demands exceed the ability to produce and prices are rising too quickly. The FOMC determines the fed funds rate and the discount rate (typically 100 basis points higher than the Fed funds rate). The fed funds rate is also known as the federal funds rate. |
