Struggle against inflation
The Primary goal of the Federal Reserve System consists in cracking down on inflation, avoiding thus economy droop. It does it by means of a monetary policy. For struggle against inflation, Fed should use a restrictive monetary policy to retard economic growth. If growth rates of gross national product more than ideal 2-3 % superfluous demand can call inflation.
The Federal Reserve System is capable to retard this growth by reduction of a monetary stock which is a total sum of the credit manufactured on the market. Actions Fed reduce liquidity in a financial system, doing drawing upon a credit more expensive. It retards economic growth and decreasing demand puts depressing pressure upon the prices.
The Federal Reserve System has some tools, traditionally used for realisation of a restrictive monetary policy, at suspicion that inflation gets out of hand. First, Fed can raise reserve requests. It is the sum which banks should keep in a stock in the end of each day. Increase of this reserve removes a part of money from the circulation. Secondly, Fed can lift a discount rate. It is the interest rate which takes Fed, allowing banks to borrow means on Federal Reserve System discount.
Fed seldom applies these two tools. Instead, as a rule, the rate on federal funds is changed. It is the interest rate of banks in payment for credits which they issue one another for maintenance of reserve requests. It is much easier for change Fed, and has the same effect, as change of reserve requests and discounting rates.
The Chairman of the Federal Reserve System Ben Bernanke has declared that the most important tool Fed on struggle against inflation consists in management of expectations of public. As soon as people start to expect inflation, they can court a trouble.