What are 'Intermediate Targets'

Intermediate targets apply to any economic variable which is vital to the economy and not under the direct control of the Federal Reserve. Examples include items such as the supply of money or interest rates. While these targets are part of the central bank’s monetary policy goals, they are only influenced indirectly through the Fed’s monetary policy decisions. Intermediate targets help to guide policy as a step between the Fed’s actual tools and its goals.

In general, intermediate targets change quickly to match new policy decisions and behave in a predictable manner relative to the Federal Reserve's stated economic goals. These targets often relate either to monetary growth or interest rates.

BREAKING DOWN 'Intermediate Targets'

Intermediate targets comprise of many different variables which the Fed uses to control the economy indirectly. Fed variables they wish to influence includes various measures to control the money supply, such as the amount of currency in circulation plus deposits, the nominal interest rate through the risk-free interest rate on Treasury Bills, and various indexes of the money supply weighted in different ways. The Fed uses three main monetary policy tools to influence those targets, including open market operations (OMO), such as buying and selling government bonds, discount window lending, and adjusting reserve requirements at depository institutions.

For example, consider a scenario where the Fed has noticed that inflation is high and it wants to reduce the money supply. In this case, it might decide to raise the discount rate through which banks can borrow money from the Fed to meet their reserve requirements. Banks will want to borrow less if that rate is increased, so they will likely choose to fulfill their reserve requirements through other means, typically using their own funds. As a result, less of those reserves will be available for bank credit. This tightening, in turn, leads to a reduction in bank loans, which leads to a tightening of the money supply.

The Fed cannot directly control an intermediate target, such as the money supply, so it has to affect the intermediate target through one of its policy tools, in this case, the discount rate.

Common Ways to Manage Intermediate Targets

Of the three tools in the Fed’s toolkit, it most commonly uses its open market operations to influence intermediate targets. The Fed buys and sells bonds all the time, which makes open market operations a more precise tool in the Fed’s efforts to achieve its goals. By comparison, the Fed rarely makes changes to the reserve requirements. Doing so would have impacts across thousands of depository institutions with difficult-to-predict ripple effects on fees and services.

RELATED TERMS
  1. Operational Target

    Operational targets are a monetary policy objective specified ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository ...
  3. Intermediate Good

    An intermediate good is a good or service used in the eventual ...
  4. Term Fed Funds

    Term Fed funds refer to funding that a bank raises in the Fed ...
  5. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  6. Reserve Requirements

    Reserve requirements refer to the amount of cash that banks must ...
Related Articles
  1. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  2. Investing

    The Fed's Tools for Influencing the Economy

    The economy can be volatile when left to its own devices. Find out how the Fed smoothes things out.
  3. Insights

    What Does the Federal Reserve Do?

    What is the Federal Reserve System and how does it affect interest rates, inflation and the market?
  4. Insights

    The Federal Reserve System Affects You More Than You Might Think

    How does the Federal Reserve System affect ordinary citizens? In more ways than you might realize.
  5. Trading

    Why Interest Rates Have Been Low for So Long

    Learn of several competing explanations about why the Federal Reserve has kept interest rates so low in the United States since 2008.
  6. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  7. Personal Finance

    How interest rate cuts affect consumers

    Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here.
  8. Investing

    Understanding The Federal Reserve Balance Sheet

    We are all connected to the Fed's balance sheet, and the currency notes that we hold are its liabilities.
RELATED FAQS
  1. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
  2. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
  3. What methods can the government use to control inflation?

    There are many methods used by the government to control inflation; one popular method is through a contractionary monetary ... Read Answer >>
  4. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
Trading Center