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How a central bank steers the economy by adjusting interest rates and the money supply.
Why It Matters
Monetary policy is the main way the Federal Reserve tries to keep prices stable and employment strong. "Tight" policy (higher rates) cools borrowing and spending; "easy" policy (lower rates) encourages them. It works in the background of almost every market move, which is why investors pay close attention to the Fed.
Key Points
- Set by the Fed, separately from government spending and taxes (which are "fiscal policy")
- The main tool is the target for short-term interest rates
- Tightening tends to slow the economy; easing tends to stimulate it
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Common Questions
How a central bank steers the economy by adjusting interest rates and the money supply. Monetary policy is the main way the Federal Reserve tries to keep prices stable and employment strong. "Tight" policy (higher rates) cools borrowing and spending; "easy" policy (lower rates) encourages them.
Monetary policy is the main way the Federal Reserve tries to keep prices stable and employment strong. "Tight" policy (higher rates) cools borrowing and spending; "easy" policy (lower rates) encourages them. It works in the background of almost every market move, which is why investors pay close attention to the Fed.
Set by the Fed, separately from government spending and taxes (which are "fiscal policy")
The main tool is the target for short-term interest rates
Tightening tends to slow the economy; easing tends to stimulate it