Glossary

Monetary policy

The actions of a central bank, such as setting interest rates, to influence money, credit and economic activity.

Also called: central bank policy, Fed policy, money supply policy

Monetary policy consists of decisions by a central bank to influence the availability and cost of money and credit in order to promote goals such as stable prices and maximum employment. In the United States, the Federal Reserve conducts it through the Federal Open Market Committee (FOMC).

The main tool is the target for the federal funds rate, the interest rate banks charge each other for overnight loans, which affects other rates. The Fed also uses open market operations, the interest it pays on reserves, lending facilities, reserve requirements, forward guidance about future policy and, in unusual conditions, quantitative easing, buying securities to push down longer-term rates. When it lowers rates, borrowing becomes cheaper and activity expands; when it raises them, activity cools and inflation eases.

The Fed has a dual mandate from Congress. Debates include whether it should follow a rule, such as the Taylor rule, rather than discretion; how independent it should be from political pressure; and whether it contributes to asset bubbles. Conservatives and libertarians have long criticized it, with some favoring a return to the gold-standard or auditing the Fed. It differs from fiscal-policy, the use of taxes and spending.

Last reviewed November 8, 2026

In the index now

Related terms

Federal funds rate The interest rate at which banks lend reserve balances to each other overnight, the Federal Reserve's main policy lever. Quantitative easing A policy in which a central bank buys government bonds and other securities in large amounts to lower long-term interest rates and support the economy. Dual mandate The Federal Reserve's congressionally assigned goals of maximum employment and stable prices (with moderate long-term interest rates). Inflation A sustained increase in the general level of prices, reducing the purchasing power of money. Fiscal policy The use of government taxing and spending to influence the economy, set by Congress and the president.