First, let’s introduce some of the monetary policy terms we’ll be using here:
Federal Open Market Committee (FOMC): The seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. Nonvoting Reserve Bank presidents also participate in deliberations and discussion.
Federal funds rate (FFR): The interest rate at which depository institutions and Federal Home Loan Banks borrow and lend reserve balances to each other overnight.
Interest on reserve balances (IORB): Interest paid on reserves that banks hold in their accounts at a Federal Reserve Bank.
Overnight reverse repurchase agreement (ON RRP): An overnight transaction in which the Federal Reserve sells a security to an eligible counterparty and simultaneously agrees to buy the security back the next day.
The FOMC sets the stance of monetary policy by adjusting the target range for the FFR. To ensure the target