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February 1985, 
Vol. 67, No. 2
Posted 1985-02-01

Operating Procedures for Conducting Monetary Policy

R. Alton Gilbert describes the methods used by the Federal Reserve since 1970 for implementing monetary policy. The Federal Reserve has stated its objectives for monetary policy in terms of growth rates of monetary aggregates since 1970. Over that period, however, the Federal Reserve has used different operating procedures in pursuing its monetary objectives. The first procedure involved targeting on the federal funds rate. The Open Market Desk supplied the amount of reserves necessary to keep the federal funds rate within ranges specified by the Federal Open Market Committee (FOMC). The second procedure involved targeting on levels of bank reserves that were estimated to be consistent with the objectives of the FOMC for the monetary aggregates. The third procedure, in effect since October 1982, involves targeting on levels of reserves borrowed by depository institutions from Federal Reserve banks. This third procedure is similar in some respects to the first procedure of targeting on the federal funds rate: under both procedures, the Federal Reserve would increase the quantity of reserves it supplies in response to an increase in the demand for reserves.