Operating Target: Definition and How It Works

An operating target is a specific, measurable financial variable a central bank sets to guide day-to-day implementation of monetary policy. It is an intermediate goal the bank can directly influence and observe—used to steer broader objectives such as stable prices, maximum employment, or sustainable growth.

Key takeaways

• Operating targets translate broad policy goals into actionable, observable metrics.
• They serve as the central bank’s feedback instrument—similar to a car’s speedometer—helping adjust monetary settings.
• The U.S. Federal Reserve primarily uses the federal funds rate (a short-term interbank rate) as its main operating target.

How operating targets work

Central banks cannot control variables like inflation or GDP directly or observe them in real time. Instead they select an economic variable that:
* Can be influenced with policy tools (open market operations, reserve requirements, discount window lending, etc.).
* Is closely correlated with the ultimate goals (inflation, employment, growth).
By monitoring this variable and adjusting policy tools, the central bank aims to influence broader economic outcomes.

Analogy: A driver cannot directly control speed without feedback—so they use a speedometer. The operating target is the central bank’s equivalent of that feedback gauge.

Adjusting the money supply

To reach an operating target, a central bank alters the supply of money and reserves in the banking system. For example:
* Buying government securities injects reserves and tends to lower short-term interest rates.
* Selling securities withdraws reserves and tends to raise short-term rates.

Setting reserves too low can risk deflationary pressure and slowed lending; too high can overheat the economy or spur high inflation. The operating target helps keep the system within a desired range.

Federal Reserve example

The Federal Reserve sets a target for the federal funds rate and implements it primarily through open market operations (buying or selling Treasury securities) to adjust overnight bank reserves. The Fed also uses public statements and forward guidance to shape market expectations about future target rates, reinforcing policy effectiveness.

Common types of operating targets

• Short-term interest rates (e.g., federal funds rate)
• Reserve balances or the supply of bank reserves
• Monetary aggregates (e.g., M1, M2) — less commonly used today
• Exchange rate targets (used by some central banks)

Why operating targets matter

Operating targets make monetary policy operational and predictable. They provide a measurable point of control for central banks, enabling timely adjustments and clearer communication with markets and the public.

Conclusion

Operating targets are practical, intermediate metrics that central banks choose to observe and influence so they can achieve broader macroeconomic objectives. By selecting an appropriate target and using policy tools to hit it, a central bank manages the short-run monetary environment and helps guide longer-run economic outcomes.