bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

428 MONETARY ECONOMICS
and tends to push the Fed funds rate up. A sale puts downward pressure on
the rate. In this way, the New York Fed seeks to keep the Fed funds rate
close to the FOMC’s target rate. Some details of the process of open market
operations are provided in Box 14.3.
Box 14.3: Federal Reserve Bank of New York open market operations
At the end of its regular meetings, the FOMC issues a directive to the New York
Federal Reserve, which indicates the approach to monetary policy considered
appropriate in the period until its next meeting. This guides the day-to-day decisions
regarding the purchase and sale of securities by the manager of the System
Open Market Account at the New York Fed. Each working day, information is
gathered about the market's activities from a number of sources.
• Discussions are held with the primary dealers in government securities
• Discussions are also held with banks in the large money centres about their
reserve needs and plans for meeting them
• Data is received on bank reserves for the previous day
• Projections of factors that could affect reserves for future days are received
from reserve forecasters
• Information is received from the Treasury about its balance at the Federal
Reserve.
Forecasts of reserves are then made and a plan of action for the day is developed
and reviewed with a reserve bank president currently serving as a voting member
of the FOMC. A summary of this discussion is sent to members of the FOMC
later in the day to allow the FOMC to monitor closely the implementation of its
directive. Conditions in financial markets, including domestic securities and
money markets and foreign exchange markets are also reviewed each morning.
The Trading Desk of the New York Fed then enters the government securities
market to execute any temporary open market operations (repos or matched salepurchase
transactions) by sending an electronic message to the primary dealers,
asking them to enter bids (if the Fed is selling) or offers (if the Fed is buying) within
10 to 15 minutes. The terms of the operation are stated but not its size — this
is announced after the operation is completed. The dealers' bids/offers are evaluated
on a competitive best-price basis and the dealers are notified whether their
bids/offers have been accepted or rejected. This usually happens about five minutes
after the bids/offers were due. Outright sales and purchases are arranged at
various times during the day, following a similar procedure.
This system clearly makes the money supply endogenous. Once the target
interest rate has been set by the FOMC, non-borrowed reserves are supplied
by the Fed through open market operations on demand from the banking
system. As we have said above, no use is made of reserve ratios to control
the rate of expansion of the banks’ balance sheets. We have a straight-