Monetary policy

Monetary policy is a set of tools used by a nation's central bank to control the overall
money supply and promote economic growth and employ strategies such as revising
interest rates and changing bank reserve requirements. In the United States, the
Federal Reserve Bank implements monetary policy through a dual mandate to achieve
maximum employment while keeping inflation in check. Monetary policy is the control of
the quantity of money available in an economy and the channels by which new money
is supplied. Economic statistics such as gross domestic product (GDP), the rate of
inflation, and industry and sector-specific growth rates influence monetary policy
strategy. A central bank may revise the interest rates it charges to loan money to the
nation's banks. As rates rise or fall, financial institutions adjust rates for their customers
such as businesses or home buyers. Additionally, it may buy or sell government bonds,
target foreign exchange rates, and revise the amount of cash that the banks are
required to maintain as reserves. Monetary policies are seen as either expansionary or
contractionary depending on the level of growth or stagnation within the economy. A
contractionary policy increases interest rates and limits the outstanding money supply to
slow growth and decrease inflation, where the prices of goods and services in an
economy rise and reduce the purchasing power of money. During times of slowdown or
a recession, an expansionary policy grows economic activity. By lowering interest rates,
saving becomes less attractive, and consumer spending and borrowing increase. Goals
of Monetary Policy
Inflation
Contractionary monetary policy is used to target a high level of inflation and reduce the
level of money circulating in the economy.

Unemployment
An expansionary monetary policy decreases unemployment as a higher money supply
and attractive interest rates stimulate business activities and expansion of the job
market.
Exchange Rates
The exchange rates between domestic and foreign currencies can be affected by
monetary policy. With an increase in the money supply, the domestic currency becomes
cheaper than its foreign exchange. In open market operations (OMO), the Federal
Reserve Bank buys bonds from investors or sells additional bonds to investors to
change the number of outstanding government securities and money available to the
economy as a whole. The objective of OMOs is to adjust the level of reserve balances
to manipulate the short-term interest rates and that affect other interest rates.
Authorities can manipulate the reserve requirements, the funds that banks must retain
as a proportion of the deposits made by their customers to ensure that they can meet
their liabilities. Lowering this reserve requirement releases more capital for the banks to
offer loans or buy other assets. Increasing the requirement curtails bank lending and
slows growth. Monetary policy is enacted by a central bank to sustain a level economy
and keep unemployment low, protect the value of the currency, and maintain economic
growth. By manipulating interest rates or reserve requirements, or through open market
operations, a central bank affects borrowing, spending, and savings rates.
Fiscal policy is an additional tool used by governments and not central banks. While the
Federal Reserve can influence the supply of money in the economy, The U.S. Treasury
Department can create new money and implement new tax policies. It sends money,

directly or indirectly, into the economy to increase spending and spur growth. Both
monetary and fiscal tools were coordinated efforts in a series of government and
Federal Reserve programs launched in response to the COVID-19 pandemic. The
Federal Open Market Committee of the Federal Reserve meets eight times a year to
determine changes to the nation's monetary policies. The Federal Reserve may also act
in an emergency as was evident during the 2007-2008 economic crisis and the
COVID-19 pandemic. A contractionary policy can slow economic growth and even
increase unemployment but is often seen as necessary to level the economy and keep
prices in check. During double-digit inflation in the 1980s, the Federal Reserve raised its
benchmark interest rate to 20%. Though the effect of high rates spurred a recession,
inflation was reduced to a range of 3% to 4% over the following years.