Monetary Policy
How central banks manage the money supply — interest rates, quantitative easing, and inflation targeting explained.
Monetary policy is how a central bank — the Federal Reserve in the U.S. — manages the money supply and credit conditions to pursue its mandates of stable prices and maximum employment. The primary tool is the federal funds rate, but central banks also use quantitative easing (large-scale asset purchases to inject liquidity) and quantitative tightening (letting those assets run off) to influence longer-term borrowing costs. Because monetary policy works with a lag — rate changes take months to fully show up in economic data — central banks act on forecasts and incoming data rather than waiting for problems to fully materialize, which is why FOMC statements are scrutinized as closely as the rate decisions themselves.
