The monetary policymaking body within the Federal Reserve System is the Federal Open Market Committee (FOMC). The FOMC currently has eight scheduled meetings per year where it reviews how to advance the dual mandate of highest economic employment and price stability. The FOMC considers how the current path for fiscal policy might affect key economic variables such as gross domestic product growth, employment, and inflation. Since the goal is price stability, they can either influence the economy’s spending up or down given the tools at their expense.

Monetary policy is used by the FED to guide the larger economy as whole to produce objectives such as price stability, full employment, and stable economic growth. Congress established maximum employment and price stability as the ideal goals for the FED. The FED is meant to keep the economy moving forward with their ability to manipulate the amount of money injected into the economy. They do this by either buying bonds or selling bonds through the Treasury; The FED uses these and other financial tactics to achieve their dual mandate set by Congress. The Fed reports to Congress during Congressional hearings and advises Congress on how it can use Fiscal Policy to help support their dual mandate.

Congress determined that the FED should operate independent of the political machine and that monetary policy should be free from political influence. As a result, the Federal Reserve is an independent agency of the federal government.

Now on the other hand, Fiscal policy is a broad term used to refer to the tax and spending policies of the federal government. Fiscal policy decisions are determined by the Congress and must be approved by the Senate and President. The three branches of government must act in unison to pass fiscal policy. The Federal Reserve plays no authority to dictate fiscal policy other than suggestions during its reports to Congress.

The Federal Reserve has a variety of tools to help it achieve its goal of maximum employment and price stability. A cardinal mechanism for this policy is to target for the federal funds rate (the rate that banks charge each other for short-term loans) The Federal Reserve’s control over the federal funds rate provides the necessary mechanism to increase or decrease the general level of short-term market interest rates. The Federal Reserve or FOMC can then affect the spending decisions of households and businesses by adjusting the Federal Funds Rate.

Did you know that since December 2008, the Federal Reserve’s target for the federal funds rate has been between 0 and 1/4 percent–effectively, as low as it can go. People watch the FED because the Federal Open Market Committee provides an indication to households, businesses, and investors about the stance of monetary policy in the near term future. This affects the entire economy and people watching will either feel an incentive to save or spend.