What Are The Operating Procedures Of Federal Reserve?

The FOMC meets eight times a year to give instructions to its operating arm, the Federal Reserve Bank of New York. The instructions are contained in an FOMC policy directive. The directive has two parts: a general assessment of economic conditions and a review of the objectives of monetary policy.

The most important part of the procedure is instructing the frontline troops at the New York Fed about how to manage financial markets on a day-to-day basis. The operating procedures have changed over time. Before the 1970s, the FOMC used to give such vague instructions as, "Keep credit conditions and interest rates as tight as they have been." Or, "Loosen credit a little to help expand gross domestic product." Because the Federal Reserve acted cautiously, it was sometimes slow to react to changing business cycle conditions.

In the late 1970s, the Federal Reserve altered its operating procedures to pay closer attention to movements in the money supply. It was accused of helping to reelect President Nixon in 1972, shortly afterward, the Federal Reserve was charged with overreacting to the sharp recession of 1974 to 1975 and with allowing unemployment to rise too sharply.