Final answer:
The Fed uses inflation targeting where it announces an inflation goal and adjusts the federal funds rate accordingly to control inflation. Additionally, it uses quantitative easing to stimulate the economy by keeping interest rates low and adding to the money supply. Unlike many central banks, the Fed also considers unemployment, not solely focusing on inflation.
Step-by-step explanation:
Techniques Used by the Fed to Control Inflation
The technique used by the Federal Reserve (Fed) to keep inflation within a certain target range over a specific time range is known as inflation targeting. This involves the central bank announcing its inflation target and then adjusting the federal funds rate to steer the inflation rate back within the target range if it deviates.
For example, Ben Bernanke, while at the Fed, advocated for targeting an expected increase in the price level of between 1% and 2%. Throughout the 1980s, 1990s, and early 2000s, the Fed has demonstrated its commitment to this strategy and has tightened the inflation target to an implied goal of 2% or less. If inflation is expected to remain below 2%, stimulative measures might be undertaken to close a recessionary gap.
Another strategy employed by the Fed is quantitative easing, a form of expansionary monetary policy aimed at convincing the public that interest rates will stay very low for an extended period to encourage spending and investment. This policy is enacted by increasing the money supply and bank reserves, which in turn should lower long-term interest rates and stimulate economic growth.
It's important to note that while many central banks around the world are legally required to practice inflation targeting, the Federal Reserve in the United States must also consider unemployment according to the law governing it, so it doesn't exclusively focus on inflation control.