What are monetary policies?

Monetary policies refer specifically to the actions taken by a country's central bank—in the United States, this is the Federal Reserve—to manage the money supply and interest rates in the economy. These policies are crucial for controlling inflation, managing employment levels, and achieving overall economic growth. By adjusting interest rates, the Federal Reserve influences borrowing costs for individuals and businesses, which in turn affects spending and investment decisions within the economy.

For example, lowering interest rates generally encourages borrowing and investment, while increasing rates can help to cool down an overheating economy. Thus, monetary policy is primarily concerned with financial mechanisms, rather than direct government spending strategies, taxation policies, or bank regulations. This distinction is key to understanding how central banks operate and influence the broader economy.