What is a key tool used by the Federal Reserve to implement monetary policy?

Open market operations are a primary method used by the Federal Reserve to implement monetary policy. This tool involves the buying and selling of government securities in the open market to influence the level of reserves in the banking system, which in turn impacts interest rates and overall economic activity.

When the Federal Reserve buys securities, it increases the reserves of banks, allowing them to lend more, leading to lower interest rates. Conversely, selling securities draws reserves out of the banking system, which raises interest rates and reduces the availability of money for borrowing. This manipulation of the money supply helps the Federal Reserve achieve its dual mandate: to foster maximum employment and stabilize prices.

In contrast, the other options listed do not pertain to direct monetary policy. Public auctions are typically not a tool of the Federal Reserve; tax incentives are part of fiscal policy, which is managed by the government rather than the central bank; and fiscal stimulus packages involve government spending rather than actions taken by the Federal Reserve to control the money supply.