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Summary

The Federal Reserve defines monetary policy as the actions it undertakes to influence the availability and cost of money and credit to help promote a stable price level and maximum sustainable economic growth. Since the expectations of market participants play an important role in determining prices and growth, monetary policy can also be defined to include the directives, policies, statements, and actions of the Federal Reserve that influence how the future is perceived. In addition, the Federal Reserve acts as a ?lender of last resort? to the nation?s financial system, meaning that it ensures its sustainability, solvency, and integrity. This role has become of great importance with the onset of the financial crisis in the summer of 2007. Traditionally, the Federal Reserve has had three means for achieving its congressionally mandated goals: open market operations involving the purchase and sale of U.S. Treasury securities, the discount rate charged to banks who borrow from it, and reserve requirements that governed the proportion of deposits that must be held either as vault cash or as a deposit at the Federal Reserve. Historically, open market operations have been the primary means for executing monetary policy. Recently, in response to the financial crisis, the discount window has become important once again and the Fed has created a number of new ways for injecting reserves, credit, and liquidity into the financial systems as well making loans to non-financial firms. The scope and magnitude of these changes are evolving. The Federal Reserve conducts open market operations by setting an interest rate target that it believes will allow it to achieve price stability and maximum sustainable growth. The interest rate targeted is the federal funds rate, the price at which banks buy and sell reserves on an overnight basis. This rate is linked to other short term rates and these, in turn, are linked to longer term interest rates. While monetary policy is charged with promoting maximum sustainable economic growth, it does so only indirectly by maintaining a stable price level since the direct effect of monetary policy is primarily on the rate of inflation. A low and stable rate of inflation through the business cycle promotes price transparency and, thereby, sounder economic decisions by households and businesses. The Fed has frequently changed the federal funds target to match changes in expected economic conditions. Between January 3, 2001, and June 25, 2003, the target rate was reduced to 1% from 6½%. This policy was reversed on June 30, 2004. In 17 equal increments ending on June 29, 2006, the target rate was raised to 5¼%. No additional changes were made until September 18, 2007, when, in a series of 10 moves, the target was reduced to a range of 0% to1/4% on December 16, 2008. These reductions were designed to ease credit market conditions and stimulate spending. This report will be updated periodically as new data become available.

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