The Federal Open Market Committee (FOMC), through its monetary policy, targets a specific level for the federal funds rate by making more or less reserve balances available to the banking system. In turn, the raising and lowering of the target level of the federal funds rate directly influences other short-term interest rates--such as deposit interest rates, the prime rate charged by banks,  credit card interest rates, and rates on adjustable rate mortgages--that businesses and consumers face. Longer-term interest rates also tend to decline. The FOMC makes changes to its target for the federal funds rate in order to help achieve its goals for monetary policy--to have the economy grow at a good pace over long periods of time while keeping inflation low and stable, and long-term interest rates moderate, as mandated by the Congress.

When the FOMC perceives that the economy is growing too slowly, the committee can lower its target for the federal funds rate. This action will stimulate economic growth because other interest rates will tend to decline as well. Lower interest rates encourage consumers and businesses to spend and borrow more, and that additional demand tends to push both economic growth and prices higher.

When high demand from consumers and businesses exceeds the ability of the economy to produce goods and services--and prices are rising--the FOMC can raise its target for the federal funds rate. That action tends to push other interest rates higher as well. Higher interest rates tend to slow demand and restrain inflation.