Monetary Policy

Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.

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Monetary Policy

The actions and inactions a central bank takes to control a country's money supply. Generally speaking, monetary policy refers to the setting of interest rates. If the central bank sets low interest rates, it increases the supply of money by easing the availability of credit. This promotes economic growth but in the long term can cause inflation. On the other hand, the central bank may adopt a restrictive monetary policy by setting high interest rates, which constricts credit and slows or eliminates growth while reducing inflation. Monetary policy may also refer to the printing of money, especially to repay government debts; this always causes inflation and is used as a last resort. See also: Hyperinflation.

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monetary policy

The Federal Reserve actions that are designed to influence the availability and cost of money. Specific policy includes changing the discount rate, altering bank reserve requirements, and open-market operations. In general, a policy to restrict monetary growth results in tightened credit conditions and, at least temporarily, higher rates of interest. This situation can be expected to have a negative impact on the security markets in the short run, although the long-run effects may be positive because of reduced inflationary pressures. Compare accommodative monetary policy.

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Monetary policy. A country's central bank is responsible for its monetary policy. In the United States, for example, the Federal Reserve aims to keep the economy growing but not allow it to become overheated.

In a sluggish economy, the Fed may lower the short-term interest rate to loosen credit and allow more cash to circulate in an attempt to stimulate expansion.

Or, if it fears the economy is growing too quickly, it may tighten credit by raising the short-term interest rate to reduce the money supply, in an attempt to rein in potential inflation.

In pursuit of its monetary policy, the Fed can also increase or decrease the money supply by buying or selling government securities.

To avoid a potential recession, for example, the Fed might increase its purchases of US Treasury notes and bonds from banks and brokerage firms, providing them with more money to lend.

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Monetary Policy

What Does Monetary Policy Mean?

The actions of a central bank, a currency board, or another regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.

Investopedia explains Monetary Policy

In the United States, the Federal Reserve is in charge of monetary policy.

Related Terms:
• Discount Rate
• Federal Funds Rate
• Federal Open Market Committee—FOMC
• Interest Rate
• Required Rate of Return