Final answer:
To move the federal funds rate back towards its targeted level if it were too low, the Fed would sell bonds, reducing the money supply and increasing the federal funds rate.
Step-by-step explanation:
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by selling bonds. This action would reduce the money supply. When the Federal Reserve sells bonds, money from individual banks in the economy flows into the central bank, which reduces the amount of money in the economy. By reducing the money supply, this increases interest rates, which in turn increases the federal funds rate. This is consistent with a contractionary monetary policy, which is employed when the Fed wishes to raise interest rates and slow down inflation.
Conversely, if the Fed wanted to decrease the federal funds rate, it would buy bonds, thereby increasing the money supply, as money would flow from the central bank to individual banks in the economy. This process would put downward pressure on interest rates, including the federal funds rate, and is a part of an expansionary monetary policy to stimulate economic activity.