Final answer:
When inflation is in line with the Federal Reserve's 2% target and the economy slows, the Fed is likely to lower the federal funds rate as a stimulative measure, affecting the IORB and ON RRP rates to encourage lending and stimulate economic activity. This has been consistent with past Fed actions to maintain inflation targets and support economic growth.
Step-by-step explanation:
If the inflation rate comes down to the Fed's 2% target and there are signs of an economic slowdown, the Fed would likely pursue an expansionary monetary policy by lowering the target federal funds rate. Using its tool of administered rates, this would involve lowering both the Interest on Reserve Balances (IORB) rate and the Overnight Reverse Repurchase Agreement (ON RRP) rate. When the Fed lowers the IORB rate, it is effectively encouraging banks to lend more by making it less profitable for them to hold excess reserves. Similarly, by lowering the ON RRP rate, the Fed is influencing the floor of the federal funds market, promoting lending between financial institutions. Overall, this action incentivizes more economic activity by reducing the cost of borrowing.
In the past, such as during Ben Bernanke's tenure and following the 2008 financial crisis, the Fed has shown a willingness to engage in significant quantitative easing to influence longer-term interest rates, and stimulate economic activity when there's a risk of deflation or economic downturn. Nonetheless, even with the commitment to low inflation, the Fed has demonstrated readiness to support the economy through stimulus when inflation is within target and growth is slow.