ANALYSIS OF THE FEDERAL RESERVE INTRODUCTION A

The Fed conducts monetary policy by setting the rates that member banks charge each other; this, in turn, provides a baseline for the interest rates that banks charge their customers since they must charge more than they pay for funds in order to realize a profit. That explains the mechanics of how the Fed conducts monetary policy. The issue of monetary policy extends well beyond that, however. The Fed is mandated by Congress to keep interest rates stable and unemployment low. This is predicated on the idea that an economy at so-called "full employment" is operating at its most efficient from an economic standpoint (Blinder, 1996).

However, the mechanism that the Fed has available to it, changing interest rates, does not have immed

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