speaking for the board of governors or the fomc. monetary policy today the federal funds rate is the rate that banks charge for lending reserves to other banks. it is therefore fundamentally determined by supply and demand in the reserves market. the federal reserve controls the supply of reserves and can therefore adjust the supply to ensure that the market clears at the fomc's target funds rate. the principal method of injecting or withdrawing reserves today is open market operations, which take two forms. the first form is outright purchase or sale of treasury securities from the fed's portfolio. the size of that portfolio today is about $ 525 billion. open market purchases of securities inject reserves into the banking system, and open market sales withdraw reserves. the second type is temporary operations, either repurchase agreements to temporarily add reserves or reverse repurchase agreements ( sometimes referred to as matched sale - repurchase agreements ) to temporarily withdraw reserves. repurchase agreements are essentially short - term loans collateralized by acceptable assets. the fed, technically, buys the underlying asset for a given price with an agreement by the selling institution to buy it back at a specified date and price. the difference between the purchase and buyback prices determines the interest rate on the loan ( the repo rate ). the federal reserve engages in temporary transactions almost every day to compensate for short - run fluctuations in other elements of its balance sheet, such as currency outstanding, float, or treasury deposits. both outright operations and temporary operations are implemented through transactions with primary security dealers. in the case of repurchase agreements, these dealers become the direct counterparty in the transaction, owing to the buyback obligation. about half of temporary operations involve treasury securities as collateral ; the other half use either federal agency debt or mortgage - backed securities issued or guaranteed by the federal agencies. reserves are also injected or withdrawn through discount window loans. these loans are made at the discretion of a bank, subject to fed restrictions related to the financial soundness of the bank and the use of the funds. in ordinary circumstances, discount window loans are a negligible source of reserves, primarily because banks are reluctant to be seen as borrowing from the fed. they fear that doing so may raise questions in the market and with the fed about the management of their liquidity and their overall safety and soundness. however, in extraordinary times, such as in the immediate aftermath of the september 11 tragedies, borrowing from the discount window can become a major source

use this strategy it will eventually encounter problems. if the exchange rate and the domestic interest rate are maintained near their current levels, the incentives for capital inflows - and thus the need for continued intervention and sterilization - will remain undiminished. accordingly, the value of outstanding sterilization bonds will continue to grow rapidly. these bonds could substitute for other assets that might be held by banks and private investors, potentially interfering with the growth and development of private financial markets. further, the perception that the rmb is undervalued ( a point to which i will return ) has fueled additional capital inflows, as investors expect to earn capital gains when the rmb ultimately appreciates. however, these speculative inflows only increase the need for exchange - market intervention and sterilization. in the longer term, the continued growth and modernization of the chinese economy will require a substantial loosening of current restrictions on the flow of financial capital into and out of the country. however, if fluctuations in the value of the rmb remain limited within a narrow range, permitting substantial capital mobility would almost entirely eliminate the pboc's capacity to use monetary policy to stabilize the domestic economy, as any excess of chinese over dollar interest rates, for example, would trigger large capital inflows. further appreciation of the rmb, combined with a wider trading band and with the ultimate goal of a market - determined exchange rate, would allow an effective and independent monetary policy and thereby help to enhance china's future growth and stability. from an institutional perspective, china may find - as many countries have done - that granting greater autonomy to the central bank, by insulating it to a degree from short - term political concerns, increases its ability to ensure price stability and support stable growth. of course, central banks must remain accountable to governments over the longer term. trade, capital flows, and the transition to domestically - led growth a central component of china's development strategy has been its openness to trade and capital inflows. for example, the value of goods exports and imports currently equals about two - thirds of china's gdp, a high level for a country of china's geographic size. china's accession to the world trade organization ( wto ) has been particularly effective in stimulating trade : since joining the wto in 2001, china has seen the dollar value of its exports grow at an average rate of about 30 percent per year, compared with annual growth of about