The Federal Reserve sets U.S. monetary policy and the New York Fed plays a central role in implementing it.
The Fed’s economic goals prescribed by Congress are to promote maximum employment, stable prices, and moderate long-term interest rates. The Federal Open Market Committee (FOMC or Committee) is responsible for monetary policy decisions to achieve these goals. The goals of maximum employment and price stability, commonly known as the “dual mandate”, create the conditions for moderate long-term interest rates. The FOMC determines the appropriate position or “stance” of monetary policy, which reflects how “accommodative” (encouraging economic growth) or “restrictive” (slowing economic growth) it should be. Once the FOMC determines the appropriate stance of policy, the Committee issues directives to the Open Market Trading Desk at the New York Fed (Desk) to implement the policy.
Monetary policy works by influencing short-term interest rates to affect the availability and cost of credit in the economy and, ultimately, the economic decisions businesses and households make. Monetary policy can also affect financial conditions more broadly as measured by financial asset prices such as stock and bond prices, longer term interest rates, and the exchange rate of the U.S. dollar against foreign currencies. This all affects economic activity and, ultimately, the Federal Reserve’s key goals of maximum employment and price stability.
The framework for implementing monetary policy includes two key parts:
- The FOMC’s primary tool for adjusting the monetary policy stance is through changes to the target range for the federal funds rate, its key policy rate. To maintain the federal funds rate well within the target range, the Federal Reserve sets the level of certain administered rates.
- The FOMC directs the Desk to execute open market operations—purchases and sales of securities, either outright or through repurchase agreements with primary dealers and the New York Fed’s other trading counterparties. These transactions affect the size and composition of the Federal Reserve’s balance sheet, which supports the FOMC’s monetary policy stance.
In addition, the FOMC at times issues forward guidance, or communications about the economic outlook and likely future course of monetary policy to shape market expectations about interest rates and financial conditions more broadly. Forward guidance is typically communicated through FOMC statements and policymaker remarks.
The FOMC announces the target range for the federal funds rate after each of the Committee’s eight meetings per year. The federal funds rate is the interest rate on transactions between banks and other eligible entities to borrow and lend their account balances at the Federal Reserve on an overnight, unsecured basis. These account balances, or reserve balances, are deposits held by eligible institutions for multiple reasons, including meeting payment obligations, managing liquidity risk, and complying with associated regulatory ratios.
With an ample supply of reserves in the banking system, the Federal Reserve controls the federal funds rate primarily through the setting of administered rates, and active management of the supply of reserves is not required.
On a daily basis, the New York Fed publishes the Effective Federal Funds Rate (EFFR), which is calculated as a volume-weighted median of the previous business day’s overnight federal funds transactions.
Control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the interest paid on reserve balances (IORB). IORB is the rate paid to banks and other eligible entities on their Federal Reserve account balances, or reserves, and is set by the Board of Governors of the Federal Reserve System (Board of Governors). By raising or lowering the IORB rate, the Federal Reserve sets a floor under the rates at which banks are willing to lend excess cash in their reserve accounts at the Federal Reserve to private counterparties. Given the safety and convenience of holding reserves, banks have little incentive to lend their reserves to private-sector counterparties at rates lower than the IORB rate.
In addition, the FOMC sets the rate for two standing open market operations, conducted on a daily basis by the Desk, that support interest rate control and are essential for monetary policy implementation and smooth market functioning:
- Overnight Reverse Repo (ON RRP) operations limit downward pressure and help to provide a floor under overnight money market rates. Overnight reverse repo operations offer a broad range of money market participants who are ineligible to earn IORB an alternative risk-free investment option that enhances their bargaining power on short-term private investment transactions. Eligible counterparties for overnight reverse repo operations include money market funds, government-sponsored enterprises, primary dealers, and depository institutions.
- Standing Repo (SRP) operations limit upward pressure and help to provide a ceiling on overnight money market rates. Standing repo operations offer an alternative, risk-free financing option that enhances bargaining power on short-term financing transactions. Standing repo operations are expected to be actively used when economically sensible. Eligible counterparties for standing repo operations include primary dealers and depository institutions.
Modest adjustments to these rates within the target range may occur to help support rate control, but they do not represent a change in policy stance.
The Federal Reserve operates additional tools that support the effective implementation of monetary policy by limiting the potential for pressures in overnight funding markets to push the EFFR above the FOMC’s target range:
- The discount window, operated at all 12 Reserve Banks, provides a source of liquidity for banks and promotes financial stability. By providing access to temporary funding, the discount window assists depository institutions in managing their liquidity risks and in turn helps support the flow of credit to households and businesses. Primary Credit is one of the key lending programs within the discount window. It is available to banks in generally sound financial condition and with eligible collateral pledged to a Reserve Bank. There are no restrictions on banks’ use of borrowed funds.
- The Foreign and International Monetary Authorities (FIMA) Repo Facility, operated by the Desk, helps to address pressures in global dollar funding markets that could otherwise affect financial market conditions in the United States. Under this backstop facility, approved FIMA account holders can enter overnight repo transactions with the Federal Reserve against Treasury securities held in their custody accounts at the New York Fed.
- Standing U.S. dollar and foreign currency liquidity swaps lines, operated by the Desk, with five other major central banks help to ease strains in global funding markets and mitigate the effects of such strains on the supply of credit to U.S. households and businesses. The U.S. dollar swap lines, which involve a temporary exchange of currencies between two central banks, provide foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.
Changes in the size or composition of the balance sheet are an important part of the monetary policy implementation framework. At the direction of the FOMC and on behalf of the System Open Market Account (SOMA)—the Federal Reserve’s portfolio of securities—the Desk purchases securities in the open market.
The FOMC may direct the Desk to conduct asset purchases for different reasons:
- Reserves Management: Asset purchases in an ample reserves regime are used to maintain a level of reserves in the banking system to support interest rate control. The Federal Reserve closely monitors the level of reserves and other liabilities on its balance sheet. The Desk may offset decreases in reserves, such as those caused by the issuance of currency, through reserve management purchases.
- Policy Accommodation: Asset purchases can be used to directly influence financial conditions, including further easing financial conditions when the policy rate is near zero. Such asset purchases put downward pressure on longer-term interest rates by reducing the stock of privately held debt.
- Market Functioning: Asset purchases can be used to address severe disruptions to market functioning by easing balance sheet constraints of private market participants to restore two-way trading and more normal market functioning.
The FOMC may also direct the Desk to reduce the size of the balance sheet when policy accommodation through asset purchases is no longer needed. This includes limiting reinvestment of proceeds from maturing securities or selling securities. For example, between June 2022 and November 2025, the FOMC directed the Desk to begin allowing Treasury and agency mortgage-backed securities holdings to mature without reinvestment up to specified amounts, which guided the pace of balance sheet reduction.
To support effective open market operations, the Desk lends eligible Treasury and agency debt securities owned by the Federal Reserve on an overnight basis. Also, to support its operational readiness to implement future directives from the FOMC, the Desk conducts very small purchases or sales of securities from time to time across a range of operation types. These operations do not represent a change in the stance of monetary policy.
