Authorizing open market operations to increase or decrease the money supply is the most powerful tool the Fed has for achieving its goals. And while the immediate response to the tightening or loosening of the supply may be muted because everyone expects it, changing the amount of money in circulation does tend to produce the effects the Fed wants.
For example, one side effect of loosening the money supply and lowering interest rates is that investors are often encouraged to invest more heavily in the stock market. That’s because investors are willing to take additional risk to get stronger returns if what they can earn with interest-paying investments drops. But that’s an indirect response, not a consequence the Fed can control.
In addition, the long-term consequences of Fed actions may not become obvious for several months, complicating the decision-making process in the interim.
