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 monetary policy. This practice has been in place since the Full-Employment and Balanced Growth Act of 1978. 

BREAKING DOWN 'Operational Target'

Operational target is the continually shifting goal which 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.

  1. 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.

  2. 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.

  3. The Federal Open Market Committee (FOMC) meets several times a year to discuss whether to maintain or change current policy about buying or selling U.S. government securities and sets the value of the operational target.

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 from do not allow for any real control or response to trends.

  1. Federal Reserve System

    The Federal Reserve System is the central bank of the United ...
  2. 1913 Federal Reserve Act

    The 1913 Federal Reserve Act was U.S. legislation that created ...
  3. Federal Reserve Bank Of Richmond

    The Federal Reserve bank of Richmond is responsible for the fifth ...
  4. Federal Reserve Board - FRB

    The Federal Reserve Board (FRB) is the governing body of the ...
  5. Intermediate Targets

    Intermediate targets are set by the Federal Reserve as part of ...
  6. Reserve Ratio

    The reserve ratio is the portion of depositors' balances that ...
Related Articles
  1. Insights

    How Much Influence Does The Fed Have?

    Find out how current financial policies may affect your portfolio's future returns.
  2. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  3. Insights

    Why Is The Federal Reserve Independent?

    An overview of the independent status of the Federal Reserve and arguments for and against it.
  4. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  5. Insights

    What Does the Federal Reserve Do?

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

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
  7. Insights

    The Federal Reserve

    As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  1. What are the implications of a low federal funds rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  2. Why do some people claim the Federal Reserve is unconstitutional?

    Learn why some people believe it was unconstitutional for the government to establish the Federal Reserve Bank and why they ... Read Answer >>
  3. Who decides when to print money in the U.S.?

    Learn the U.S. Treasury's Federal Reserve Bank's roles in the process of printing money in the United States. Read Answer >>
  4. How Central Banks Influence Money Supply

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. Learn more ... Read Answer >>
  5. Who determines interest rates?

    Learn who determines interest rates. In countries using a centralized banking model, interest rates are determined by the ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center