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Domestic open market operations during 2001

The directives pertinent to the implementation of domestic open market operations issued by the Federal Open Market Committee (FOMC) instruct the Trading Desk at the Federal Reserve Bank of New York (FRBNY) to foster conditions in the market for reserves consistent with maintaining the Federal funds rate at an average around a specified rate. This indicated rate is commonly referred to as the Federal funds rate target. The Desk arranges open market operations to target the funds rate, while at the same time achieving certain other objectives that may affect the structure of the Federal Reserve balance sheet. This report reviews the conduct of open market operations in 2001. It begins with a description of the operating procedures that are used to control the funds rate and a summary of the key new developments in the policy implementation framework. The demand for balances at the Federal Reserve and the behavior of autonomous factors outside the control of the Desk that affect the supply of these balances are described in the following sections. Next, the different domestic financial assets held by the Federal Reserve, and the various types of open market operations used to adjust them, are reviewed. The behavior of the Federal funds rate in 2001 and use of the discount window are discussed in the following section. The conduct of open market operations in the aftermath of the terrorist attacks on the World Trade Center and Pentagon on September 11 is reviewed in the final section. The FOMC lowered the Federal funds rate target on eleven different occasions during 2001, reducing it by a cumulative 4 ¾ percentage points to end the year at a level of 1 ¾ percent (Table 1). Three of these rate changes were made between regularly scheduled FOMC meetings. Associated with each FOMC policy move, the Board of Governors approved an equal sized reduction in the basic discount rate, which preserved a 50 basis point spread of the target funds rate over the discount rate. To target the Federal funds rate, the Desk uses open market operations to align the supply of balances held by depository institutions at the Federal Reserve—or Fed balances—with banks' demand for holding balances at the target rate. Each morning, the Desk considers whether open market operations are needed based on estimates of the supply of and demand for balances, taking account of possible forecast errors and minimal levels of …