To change the federal funds rate, the Fed:

a. Increase or removes money from the stock market,

b. Uses open market operations to change the quantity of reserves,

c. Changes the income tax rate on interest income,

d. Coordinates with banks on establishing the new rate,

e. Tells banks how much to charge.

The Fed (b) uses open market operations to change the quantities in reserve to change the Federal fund rates. The Federal Reserve uses OMO to get the set federal fund rates it set though buying or selling Treasury securities. The Fed requires that banks have some money each night, a requirement that prevents lending every cash they have to enable them to start a business the following day. Whenever the banks are short of cash, then the federal fund rate comes in.

When the FOMC wants to reduce the federal fund rates, the Fed buys securities from the member banks, depositing credits on these banks' balance sheets, thus giving the banks more reserves than needed. The banks then have to lower their federal fund rates to lend extra cash to each other, lowering interest rates in the process.

When the Federal wants the rates to be higher, it sells the treasury securities to the member banks and removes funds from the bank's balance sheets. Thus, the banks end up with lesser reserves allowing them to increase the rates.