The monetary base is currency plus reserves. Banks--and through them their customers-- Determine the division of the base Between currency and reserves. But the Fed controls total base supply. Indeed, the Fed controls both The position of the vertical base supply curve And the flat part of the base demand curve. Base supply shifts out When the Fed creates money By putting a higher number On a reserve account balance Of a bank it buys a T-bill from. Base supply shifts back When the Fed annihilates money By putting a lower number On a reserve account balance Of a bank it sells a T-bill to. The flat part of the base demand curve Shifts up when the Fed raises interest on reserves. It shifts down when the Fed cuts interest on reserves. The Fed has never cut interest on reserves below zero. Since the Great Recession, from 2009 on, The Fed has controlled the interest rate By keeping the monetary base big enough That it intersects the flat part Of the base demand curve So that the target rate Is determined by the interest rate on reserves. It took the Fed a while to admit to itself That this was its new operating procedure. But it has become more and more comfortable with it. The origins of this operating procedure Were in Quantitative Easing, which involved A large increase in the base, Not only by buying T-bills, But also by buying long-term Treasury bonds And mortgage-backed securities implicitly guaranteed by the government. But now it is standard practice. The Fed, the Bank of Banks, is full of power. It chooses the safe interest rate, And through that, chooses aggregate demand And so chooses output in the short run. But in the long run, the Fed's main power is only over inflation.