The U.S. Central Bank has full independence in setting monetary policy to achieve maximum non-inflationary growth. The Feds chief policy signals are: open market operations, the Discount Rate and the Fed Funds rate.


Federal Open Market Committee

The FOMC is responsible for making decisions on monetary policy, including the crucial interest rate announcements it makes 8 times a year. The 12-member committee is made up of 7 members of the Board of Governors the president of the Federal Reserve Bank of New York while the remaining four seats carry one-year term each, in a rotating selection of the presidents of the 11 other Reserve Banks.


Interest Rates

Fed Funds Rate Clearly the most important interest rate. It is the rate that depository institutions charge each other for overnight loans. The Fed announces changes in the Fed Funds rate when it wishes to send clear monetary policy signals. These announcements normally have large impact on all stock, bond and currency markets.


Discount Rate

The interest rate at which the Fed charges commercial banks for emergency liquidity purposes. Although this is more of a symbolic rate, changes in it imply clear policy signals. The Discount Rate is almost always less than the Fed Funds Rate.



BACK