Macroeconomics hw question? (10pts)?

Question

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. Why doesn't it target the money supply at the same time?

I always give best answer :D

Answer 1

The federal funds rate (which is the rate banks charge each other for overnight loans) depends on both the money supply AND the demand for money.  The Fed can't control the demand for money, but it can control the supply.  "Targeting the federal funds rate" means the Fed adjusts the money supply in responses to changes in the demand for money.

Say the Fed targeted the money supply instead (as it did back in the 1970s).  Then changes in money demand would cause the equilibrium fed funds rate to change.