When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Question

Quizplus · Accepted Answer

The Federal Reserve adjusts the supply of reserves in the banking system through open market operations to keep the federal funds rate—the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight—close to its target, thereby accommodating fluctuations in money demand.

When the Fed Announces a Target for the Federal Funds