What Is an Operational Target?
The operational target is an economic term used for the declaration the Federal Reserve Board (FRB) chairman makes twice a year to Congress regarding expectations around monetary policy. The Fed's Chairman statements speak to existing non-borrowed assets and money supply, as it relates to the impacts of the day-to-day use of the monetary policy. This practice has been in place since the Full-Employment and Balanced Growth Act of 1978.
Understanding Operational Target
The operational target is the continually shifting goal that guides the day-to-day actions of the central bank. The Federal Reserve Board decides on the value of the operational target at each of its meetings. They then use administrative tools to reach this target. Much of the operational target aims at adjustments to the short-term inter-bank interest rate.
In addition to serving to inform the federal government of monetary policy, the operational target is one of the primary ways the Federal Reserve communicates its strategy directly with the public.
The Fed Determines Operational Targets
The operational target is determined by the Federal Reserve, which is the central bank of the United States. Arguably the most powerful financial institution in the world, the Fed, is considered to be independent because its decisions do not need Presidential ratification, but it is still subject to Congressional oversight and must work within the framework of the government’s economic and financial policy objectives. The system comprises three fundamental entities.
- The Federal Reserve Board of Governors, among other duties, will analyze domestic and international economic developments, supervise and regulates the operations of the Federal Reserve Banks, has responsibility for America's payment system, and oversees and administers most consumer credit protection laws.
- Twelve Federal Reserve Banks are each responsible for a specific geographic area of the U.S. and based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
- The Federal Open Market Committee (FOMC) meets several times a year to discuss whether to maintain or change the current policy about buying or selling U.S. government securities and sets the value of the operational target.
The oversight of the Fed is by the chairman of the Federal Reserve Board. The Federal Reserve system is responsible for conducting the nation’s monetary policy, maintaining stability within the nation’s financial system, regulating and overseeing financial institutions, system protocols, and consumer protection. One of the ways they achieve these objectives is through the defining of the operational target.
Twice a year, the chairman of the Federal Reserve Board will make projections to Congress about any expected achievements based on new and adjusted monetary policy. This operational target is an expectation for earnings and advancements in the coming year. Using a combination of knowledge of current funds and liquid assets, or money supply, circulating in the United States and non-borrowed reserves, or the assets that the Federal Reserve already holds, the chairman informs Congress what to expect for the nations central banking system.
Origin of the Operational Target
In 1978, President Jimmy Carter signed an amendment to the Employment Act of 1946, called the Full Employment and Balanced Growth Act of 1978. A portion of the Act allowed the federal government a more significant role in creating and executing monetary policy. As such, the federal government began to expect a statement from the Fed, which will plan for day-to-day fiscal management.
Some think that the operational target statements serve no real purpose due to the nature of the ever-changing market. These critics say that fixating on the daily changes does not allow for any real control or response to trends.