Monetary policy is a strategy that is used to promote maximum employment, stable prices, and moderate long-term interest rates. The Federal Reserve conducts monetary policy in order to pursue economic goals in the U.S. Here’s what you need to know about how monetary policy works and the ways it impacts the economy.

Frequently Asked Questions

  • What is monetary policy?

    Monetary policy is a strategy that is used to adjust the money supply in an economy and how much it costs to borrow. A country’s central bank—like the Federal Reserve in the U.S.—may use monetary policy to lower interest rates, which then encourages consumers to spend more money on goods and services.

  • Who conducts monetary policy?

    The Federal Open Market Committee (FOMC) conducts monetary policy in the U.S.. The FOMC is part of the Federal Reserve and it meets eight times per year to discuss the U.S. economy. The FOMC implements monetary policy to promote maximum employment, stable prices, and moderate interest rates over time.

  • What are the tools of monetary policy?

    There are three tools commonly used to conduct monetary policy: reserve requirements, the discount rate, and open market operations. These tools then impact the federal funds rate which leads to changes in other interest rates. This may lower the cost of borrowing for individuals and businesses, which then increases money and credit in the economy, and can reduce unemployment and inflation.

  • What is the difference between monetary policy and fiscal policy?

    Monetary policy is used to promote maximum employment, stable prices, and moderate long-term interest rates. Fiscal policy is what’s used to manage the tax and spending policies of the U.S. government. The Fed conducts monetary policy, while Congress and the administration determine fiscal policy decisions.

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