Monetary Policy
Central bank actions to control money supply and interest rates to achieve economic goals.
What is Monetary Policy?
Monetary policy refers to the actions taken by a central bank — such as the US Federal Reserve — to control the supply of money and the level of interest rates in the economy. The primary tools are the policy interest rate (federal funds rate in the US), open market operations (buying/selling government securities), and reserve requirements. Expansionary (loose) monetary policy lowers rates to stimulate borrowing and growth; contractionary (tight) policy raises rates to reduce inflation. Central banks typically operate with a dual mandate of price stability and maximum employment.
Example
Between March 2022 and July 2023, the Federal Reserve raised the federal funds rate from 0.25% to 5.25–5.50% — the fastest tightening cycle in decades — to bring inflation back toward its 2% target.