The goal of the Fed's fiscal and monetary policy is for the economy to experience GNP growth, a high employment rate, and a stable inflation rate. The regulation of government spending and taxation (fiscal policy) influences economic activity and the rates of emplyment and inflation. The Federal Reserve was created in 1913 to govern monetary policy. The Fed influences interest rates by controling the volume of bank reserves. Changes in interest rates in turn affect the behavior of businesses and individuals. In a recession, the Fed moves to stimulate credit expansion by increasing bank reserves, which leads to lower interest rates. In a period of economic expansion, the Fed will move control the growth of the economy by decreasing bank reserves.

The Federal Reserve can implement monetary policy in three ways:

Open Market Operations

The Federal Open Market Committee (FOMC) manages a portfolio of government securities, including US Treasury Bills, Bonds and Notes.

The Discount Rate

The Discount Rate refers to the interest rate that member banks pay when they borrow from the Federal Reserve.

Reserve Requirements

The Reserve Requirement refers to the percentage of deposits that banks are required to hold as non interest baring assets.

Policy	Expansionary Action	Contractionary Action
Open Market Operations	Buy US Treasury securities and increase reserves	Sell US Treasury securities and decrease reserves
The Discount Rate	Lower Disount Rate	Raise Discount Rate
Reserve Requirements	Lower Reserve Requirements	Raise Reserve Requirements

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