What is Monetary policy

Monetary policy is a set of tools a nation’s central bank uses to control the money supply and promote economic growth. It involves revising interest rates, buying government bonds, targeting foreign exchange rates, and changing bank reserve requirements. The Federal Reserve Bank implements it in the US through a dual mandate.Monetary Policy Meaning, Types, and Tools

Monetary goals

The Federal Reserve Act mandates the Federal Reserve to conduct monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. Decisions about monetary policy are made at meetings of the Federal Open Market Committee (FOMC). The FOMC judges that low and stable inflation at 2 percent per year is most consistent with achieving both parts of the dual mandate. To assess the maximum-employment level, the FOMC considers a range of labor market indicators, including how many workers are unemployed, underemployed, or discouraged. The FOMC does not specify a fixed goal for employment but releases estimates of the unemployment rate they expect to prevail once the economy has recovered from past shocks.Monetary Policy Principles and Practice

How does Monetary policy work ?

A central bank oversees the money supply in the economy through monetary policy. The central bank has the authority to alter the federal funds rate, which is the interest rate that banks can charge one another to meet mandatory reserve requirements. Individuals and businesses borrowing from or lending money to their banks are affected by changes in interest rates.

The monetary policy approach generally operates as a directing or moderating impact on the economy. Central banks attempt to slow down significant economic fluctuations that could severely affect people’s assets and the value of their money by modifying how appealing it is to engage in particular economic activity—for example, by raising or reducing bank lending rates.How Monetary Policy Works: Main Types of Monetary Policy