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The Tools of the Monetary Policy

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Is the Fed controlled by Congress or the executive branch of the government? What are the three tools the Fed has available to influence the economy? What can it do today to get the economy to recover?

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Solution Summary

The Fed is free from the influence of the President or the Congress in its policy decision. The Fed uses three tools to control the money supply, ie open market operation, reserve requirement and discount window lending.

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Although the Fed was created by the act of Congress, it has the authority to conduct the monetary policy without getting approval from the President or from the Congress. The only direct control from the President on Fed is through the appointment of the seven governors and appointing one of them as the chairman. Because they are appointed for only one term of 14 years, they should have no interest to please the President for reappointment. However, some of the governors are appointed due to their political affiliation.

The three tools of monetary policy used by Fed are:

1. Open market operation
This tool ...

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