Question

Describe the Federal Reserve’s traditional and nontraditional monetary policy tools.

Answer 1

Traditional Tools are:

Monetary policy is an interest rate or money-supply tool that a central bank may use to achieve its objectives. Standard monetary policy in the United States is directed at the Federal Funds Rate — the interest rate that banks charge each other for overnight loans. Open Market Operations, our most common tool, involves the purchase and sale of government securities.

As the supply of money goes up, interest rates go down. And thus this is conventional monetary policy — buying and selling short-term securities, and having an effect on money supply and interest rate. During the financial crisis, this is what we did we used the monetary policy instrument to drive interest rates to virtually zero.

With an economy suffering under high unemployment and a tentative recovery underway, it was left to the Fed (as well as other central banks around the world) to decide what kinds of policies to adopt to help stabilize the economy.

Non Traditional Tools are:
The first of these tools is purchases of large-scale assets, dubbed "quantitative easing," and three rounds have been implemented by the Fed. The first round consisted of purchasing government and agency securities, the second round was government securities and the third round began with mortgage-backed securities and then added government securities