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    Federal Reserve and Congress

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    As a member of the Federal Reserve you are speaking with a group of newly elected members of Congress to explain your operations. The members of Congress have asked you to address the following issues.

    The Federal Reserve has traditionally conducted open market operations through the purchase and sale of government bonds. In principle, could the Federal Reserve conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange? Do you see any possible drawbacks to such a policy?

    Suppose the Federal Reserve purchased gold or foreign currency. How would this purchase affect the domestic money supply? [Hint: Think about open market purchases of government bonds.]

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    These policies can be covered in the open market operations. Generally Federal Reserve does not interfere in the operations of the capital markets that is stock market. If they will do such thing than that will be seen as extreme step and may create panic in the market. Thus it should not resort to this measure.

    Basically the Federal Reserve should deal in government securities. They can also deal in purchase of gold or foreign currency. ...

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