The Federal Reserve has four tools of conventional monetary policy.

a. The target range for the federal funds rate:

i. Set by the FOMC, it is the intended range for the interest rate charged by financial intermediaries on overnight, uncollateralized loans to banks.

ii. The target level of the federal funds rate was the primary tool of policy before 2008.

b. The interest rate on excess reserves (IOER rate):

i. Set by the FOMC, it is the interest rate paid by the Federal Reserve on excess reserves held by banks.

ii. It determines the short-term market rate (the federal funds rate) because banks prefer to deposit at the Fed rather than lend to others at or below the IOER rate.

iii. It is currently the primary tool for influencing financial conditions in the economy.

c. The discount rate:
i. Set by the Reserve Banks, subject to approval by the Federal Reserve Board, it is the interest rate on discount lending, used by the Fed as the lender of last resort to supply funds to banks in need to maintain financial stability.
ii. The “primary rate” for discount lending is set at a spread above the interest rate on excess reserves (IOER rate).

d. Reserve requirements:
i. Set by the Federal Reserve Board, the requirements determine how much banks are required to hold in reserve against certain deposits.
ii. Banks hold required reserves in the form of interest-bearing reserve deposits at Federal Reserve Banks or as vault cash.
iii. Required reserves have a limited policy role today because they are much smaller than excess reserves, and the impact of changes in reserve requirements is difficult to predict.