1. Suppose that the FOMC issues a new Directive to the Trading Desk at the Federal Reserve Bank of New York specifying a new federal funds rate target of 2.25 percent. What policy action should the Trading Desk implement to comply with the new FOMC Directive? a. At the conclusion of each FOMC meeting, the Committee issues a statement that includes the federal funds rate target, an explanation of the decision, and the vote tally, including the names of the voters and the preferred action of those who dissented. To implement the policy action, the Committee issues a directive to the New York Fed’s Domestic Trading Desk that guides the implementation of the Committee’s policy through open market operations. Before conducting open market operations, the staff at the Federal Reserve Bank of New York collects and analyzes data and talks to banks and others to estimate the amount of bank reserves to be added or drained that day. They then confer with Fed officials in Washington who do their own daily analysis and reach a consensus about the size and terms of the operations. Then, a New York Fed official sends a message to the primary dealers to indicate the Fed’s intention to buy or sell securities, and the dealers submit bids or offers as appropriate.

2. Explain the adjustments that will take place in the above diagram following the policy action you identified in part (a). b. The Federal Reserve bank would need to account for less reserves but add onto the percentage rate of funds just as shown for the equilibrium. The change in the graph will be as shown below.