ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed implements monetary policy primarily by influencing the federal funds rate, the interest rate that financial institutions charge each other for loans in the overnight market for reserves.

Detailed explanation-2: -When the Fed wants to adjust interest rates, it moves the range set by IORB and ON RRP rates higher or lower. This causes the banks to raise or lower their interest rates correspondingly. In turn, these rates affect all other interest rates in the economy.

Detailed explanation-3: -The fed funds rate impacts how much commercial banks charge each other for short-term loans. A higher rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.

Detailed explanation-4: -The Federal Reserve conducts the nation’s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy. Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates.

Detailed explanation-5: -The Fed has the ability to influence the federal funds rate by changing the amount of reserves available in the funds market through open-market operations-namely, the buying or selling of government securities from the banks.