The Fed uses the term target when it announces how it intends to change the federal funds rate because
A)the change in the interest rate is a new law that all banks must adhere to.
B)the Fed has no influence over the federal funds rate.
C)the Fed can control the real interest rate but has no control over the nominal interest rate.
D)the Fed expects the U.S.Treasury to conform with its monetary policy.
E)the Fed has no direct control over interest rates and can only influence rates toward a target value.

Question

Quizplus · Accepted Answer

The Fed has no direct control over interest rates but it can influence them by buying and selling government securities in the open market. By setting a target for the federal funds rate, the Fed aims to guide the market rate of interest toward that level. However, the Fed cannot force banks to charge a particular interest rate or mandate that they make a certain amount of loans. Rather, the Fed relies on its influence on the overall level of reserves and liquidity in the banking system to affect the behavior of banks and the economy as a whole.

The Fed Uses the Term Target When It Announces How