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The Federal Reserve develops monetary policy, the tools that are used to conduct this policy is the open-market operation. "The federal funds rate is the short-term interest rate that banks charge each other for loans. If one bank doesn't have enough reserves, it can temporarily borrow from a second bank that has excess" (Mankiw,2021).

The changes that the federal funds rate makes influence other interest rates that also influence the costs of borrowing in households and businesses. When interest rates go down, the cheaper it is to borrow, so a household will be more willing to buy goods and services. Business can purchase items to expand their business, like property or equipment. This also allows business to hire more workers which in turn, influences employment rates. If there is a higher demand for goods and services, this will increase wages and costs, this will affect the inflation rate. "The Fed's policy decisions are key determinants of inflation in the long run and employment and production in the short run" (Mankiw, 2021).

Mankiw, N. G. (2021). The Monetary System. Principles of Economics 9^th Edition. Cengage Learning

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