Final answer:
The Fed can move the federal funds rate to its target by buying bonds to lower the rate or selling bonds to raise the rate. Additionally, when traditional tools are insufficient, it may implement quantitative easing, purchasing long-term securities to affect longer-term interest rates and stimulate economic activity.
Step-by-step explanation:
The actions that the Federal Reserve (the Fed) can take to move the federal funds rate towards its target are an important part of monetary policy, especially in influencing economic activity. When the Fed desires to lower the target for the federal funds rate, it participates in the open market by buying bonds. Buying bonds increases the money supply, as it pays for these bonds with newly created bank reserves which lowers interest rates as more funds chase the same amount of loans.
Conversely, when the Fed aims to raise the target federal funds rate, it sells bonds in the open market. Sellings bonds absorb liquidity, as financial institutions pay for these bonds with their reserves which decreases the money supply, subsequently raising interest rates.
At times when the Fed has maxed out traditional tools, such as when short-term rates reach the zero lower bound, it may resort to quantitative easing (QE). QE involves the purchase of longer-term securities in an attempt to put downward pressure on longer-term interest rates and stimulate economic activity by making financial conditions more accommodative.