The primary policy instrument of the Federal Open Market Committee (FOMC) is:

Question

Quizplus · Accepted Answer

The target federal funds rate is the primary policy instrument of the FOMC, which is the interest rate at which depository institutions lend or borrow funds from each other overnight. By setting a target federal funds rate, the FOMC influences the interest rates throughout the economy, impacting borrowing and spending decisions of households and businesses, and ultimately affecting inflation and employment. The FOMC conducts open market operations to achieve its target federal funds rate by buying or selling government securities in the open market, thereby affecting the supply of and demand for reserves in the banking system. The other policy instruments listed also influence monetary policy, but they are not the primary tools that the FOMC uses to conduct monetary policy.

The Primary Policy Instrument of the Federal Open Market Committee