Overview of the Fed’s Operations

Figure 26-3 shows the various stages of Federal Reserve operations as seen by-the Fed. The Federal Reserve has at its disposal a number of policy instruments. These can affect certain intermediate targets (such as reserves, the supply, and interest rates). These instruments are intended ‘to help achieve the ultimate objectives of a healthy economy- low inflation, rapid growth in output, and low unemployment, It is important to keep these different groups (policy instruments, intermediate targets, and ultimate objectives) clearly distinct in our analysis.

In managing money, the Federal Reserve must keep its eye on a set of variables known as intermediate targets. These are economic variables that art” intermediate in the mechanism he tween and ultimate policy goals. When the Fed wants to affect its ultimate objectives. it first changes one of its instruments such as the discount rate. This change affects an intermediate interest rates, credit conditions. or the Much as a doctor red in the health of a patient will monitor and blood pressure. so the Federal Reserve keep- a careful on it targets.