Operational targets are a crucial tool in the arsenal of a modern central bank. They are intermediate goals that guide the day-to-day actions of the central bank while offering feedback on the success of monetary policy. The operating target serves as the speedometer of the economy, guiding the monetary fuel that needs to be added to ensure the engine runs at the right speed.

The U.S. Federal Reserve’s primary operating target is the federal funds rate. The federal funds rate is the main tool the Federal Reserve uses to manage the money supply in the United States. It sets the interest rates at which banks can borrow money from each other in the interbank market. By making the funds available through daily operations and adjusting the rate, the Federal Reserve can control the amount of money that is circulating in the economy.

By targeting the federal funds rate, the Federal Reserve can help to promote economic stability. This rate is usually set at a level that is either above or below the market rate, depending on whether the central bank wishes to stimulate the economy or reduce inflation. For example, the Federal Reserve may reduce the funds rate in order to promote economic growth and employment.

The effectiveness of the operating target as an indicator of the success of monetary policy depends on two factors. Firstly, the effective rate must be consistently monitored. Additionally, the central bank must adjust the rate in response to changes in the economic outlook.

In conclusion, the operating target is a highly effective tool used by the Federal Reserve to manage the money supply in the U.S. and promote economic stability. By setting the operating target and making the funds available through daily operations and adjustments to the rate, the Federal Reserve has a powerful tool at its disposal to ensure the engine of the U.S. economy runs at the desired speed.