What is the primary policy instrument of the Federal Open Market Committee (FOMC)?

The target federal funds rate is the primary policy instrument of the Federal Open Market Committee (FOMC) because it directly influences monetary policy and the overall economy. The FOMC sets a target for the federal funds rate, which is the interest rate at which banks lend reserve balances to other depository institutions overnight. By adjusting this target, the FOMC can influence economic activity, employment, and inflation.

When the target federal funds rate is lowered, borrowing costs decrease, which can stimulate spending and investment. Conversely, if the target rate is increased, it can curb spending and help control inflation. This makes it a pivotal tool for managing the economy.

The required reserve rate and the discount rate are also tools used by the Federal Reserve, but they are not the primary instruments for day-to-day monetary policy adjustments like the target federal funds rate is. The required reserve rate controls the amount of funds banks must hold in reserve, and the discount rate is the interest rate charged to commercial banks for borrowing funds from the Federal Reserve. The exchange rate does not fall under the jurisdiction of the FOMC as a policy instrument since it primarily pertains to the valuation of a currency in the foreign exchange market. Thus, it is the target federal funds rate that plays