In practice, it usually buys treasury bills from banks.
In order to pay a bank, it need not print more money: it simply increases the recorded size of that bank's reserve.
The bank eventually lends the extra money out, putting it in circulation. </li></ul>
Taking Money Out <ul><li>In order to get money out of the economy, the Fed sells its assets.
Its capabilities are more limited in this area </li><ul><li>In order to put money in, they could theoretically buy anything, and have at times gone beyond the traditional purchasing of treasuries
Conversely, it can only sell what assets it has. </li></ul></ul>
Interest Rates <ul>But wait! Aren't people always talking about the Fed increasing or lowering ”interest rates” or ”the interest rate”? Are they making things up? Am I making things up? Am I just stupid? </ul>
The Federal Funds Rate <ul><li>The interest on very short term, overnight loans that banks make to one another is called the Federal Funds Rate .
The Fed sets a target for the federal funds rate and uses this as a guide to how much money it should take out of or put into the economy.
The Fed sets a lower target when it wants a looser monetary policy, and a higher target when it wants a tighter one. </li></ul>
How it Works in Practice <ul><li>Unlike the Discount Window Rate, the Fed does not set the Federal Funds Rate directly.
When it is higher than they want it to be, they put more money into the economy.
When it is lower than they want it to be, they take more money out of the economy. </li></ul>
That's It! <ul>It's not an exhaustive explanation of what the Fed does all the time, but this presentation should be sufficient to give you a good idea of what the Fed is doing 90% of the time. </ul>
Recommended Further Reading <ul><li>Federal Reserve System , at the Concise Encyclopedia of Economics
Open Market Operations , from the Federal Reserve Website
Monetary Policy , from the Federal Reserve website
Federal Reserve 101 , at my blog Sophistpundit </li></ul>
Image Attribution <ul><li>Federal Reserve Building from Wikipedia
Drive Through Bank Teller from frankh's photostream