How Does the Fed Lower Interest Rates?
Open Market Operations Arguably the most important tool of the Federal Reserve (or, simply, “Fed”) for lowering interest rates is called “open market operations.” This is an act of monetary policy that adds or subtracts money to the U.S. banking system. It does this through the purchase and sale of federal securities. When the Fed sells securities, it drains money from the banking system, as the banks buy up government debt. In exchange, the banks have invested in government debt instruments, such as bonds. When the Fed buys these securities back, it does the opposite: money is injected into the banking system. The Federal Funds Rate The Fed controls interest rates mostly through targeting what is called the federal funds rate, or the rate that banks charge each other for short-term, overnight loans of funds kept on deposit at the Federal Reserve. All banks keep these deposits with the Fed in order to meet their minimum reserve requirements. The problem with targeting the federal funds
