When we talk about how the Federal Reserve works, we sometimes talk about it in terms of a toolkit. As in, a rate change is the tool that the Federal Open Market Committee is employing to guide monetary policy.
But there is no actual tool, per se: Instead, there’s a lot of work being done by Fed employees.
“Basically what the Federal Reserve does is instruct the desk at the New York Fed to carry out the policy as stated,” said Tim Duey, chief U.S. economist at SGH Macro Advisors. “The New York Fed is the agent for the Federal Reserve that that buys and sells or purchases themselves Treasury securities, in order to follow the objectives of the FOMC as far as interest rate policy.”
The FOMC decides rates, open market operations make them happen — traditionally by buying and selling government securities to change the money supply and influence interest rates.
And it’s all happening in the open market where banks and dealers can get in on the action.
Julie Remache is deputy manager of the System Open Market Account — which is to say she works at the desk in charge of open market operations at the Federal Reserve Bank of New York.
“Let’s say this is a day when the policy rate has been changed,” Remache said. While the rest of us are still waiting to hear from Fed Chair Jerome Powell at the FOMC press conference, that open market desk at the New York Fed recieves marching orders.
“At that meeting, the committee would, at the same time, issue an implementation note that would outline various changes that are relevant for the trading desk in New York to support monetary policy implementation,” Remache said.
That implementation note is like a set of open market operations instructions.
For example, in December, after the Fed cut rates by a quarter point, that implementation note included action items such as, “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”
And that task is not limited to Fed day.
“We are staffed throughout the trading day, through the U.S. session,” Remache said. “And then, as needed, if we’d anticipate an event or [we’re] responding to events in the markets, we might be fully staffed 24 hours.”
Analysts at the New York Fed are doing more than just trading and managing assets, too.
“We’re trying to sort of understand and get a pulse on what’s happening in markets, and think about the variety of policy questions that are important to policy makers,” Remache said.
That market insight gets added to the mix of price data, employment reports, and all kinds of other numbers that the FOMC looks at when deciding how to guide monetary policy next time they pull out their toolkit.