Reserve Bank of Richmond, contended that attempts by the Federal Reserve to manage interest rates required the agency, in essence, to "give up control of money growth and inflation" (p. 17). In this context, Goodfriend (1981) claimed that policy objectives based on one element of the Federal Reserve System's mandate would invariably conflict with those objectives based on another element of the mandate.
In spite of dissenting arguments from within the agency, the broad mandate remains as the basic policy objective for the Federal Reserve System, and the agency is expected to promote growth, maximize employment, and maintain stability in the economy. While accomplishing these objectives, the system is also expected to maintain price stability, seek moderate long-term interest rates, and protect the value of the dollar (Board of Governors, Federal Reserve System, 1995). In an economic context, the Federal Reserve System really is expected to be all things to all people.
The Federal Reserve can exert a significant influence on the level of interest rates through the development and implementation of monetary policy. Through manipulation of the money supply, the Federal Reserve can cause interest rate changes on a somewhat delayed basis. Through the setting of the discount rate and the inter bank borrowing rate, the Federal Reserve can exert a more immediate impact on interest rate levels (Board of Governors, Federal Reserve System, 1996).
The Federal Reserve System has been provided with the authority by Congress to use several tools in regulating the economy including the manipulation of interest rates. Three of these tools that are of primary importance are as follows (Board of Governors, Federal Reserve System, 1996):
1. The coordinated use of open market operations is the first monetary control tool. Through the use of open market operations, the Federal Reserve System may either restrict or expand the supply of ...