Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
The U.S. Treasury Department has the ability to create money, but the Federal Reserve influences the supply of money in the economy, largely through open market operations (OMO). Essentially, this means buying financial securities when easing monetary policy and selling financial securities when tightening monetary policy. The Fed's preferred securities for OMO are U.S. Treasuries and agency mortgage-backed securities.
The goal is to keep the economy humming along at a rate that is neither too hot nor too cold. The central bank may force up interest rates on borrowing in order to discourage spending or force down interest rates to inspiremore borrowing and spending.
The main weapon at its disposal is the nation's money. The central bank sets the rates it charges to loan money to the nation's banks. When it raises or lowers its rates, all financial institutions tweak the rates they charge all of their customers, from big businesses borrowing for major projects to home buyers applying for mortgages.
All of those customers are rate-sensitive. They're more likely to borrow when rates are low and put off borrowing when rates are high
KEY TAKEAWAYS
Monetary policy is a set of actions that can be undertaken by a nation's central bank to control the overall money supply and achieve sustainable economic growth.
Monetary policy can be broadly classified as either expansionary or contractionary.
Some of the available tools include revising interest rates up or down, directly lending cash to banks, and changing bank reserve requirements
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