What is "monetary policy"?

Monetary policy refers specifically to the actions undertaken by a central bank, such as the Federal Reserve in the United States, to regulate the amount of money in circulation and influence interest rates. This is achieved through various tools like open market operations, adjusting reserve requirements, and changing the discount rate. The primary goals of monetary policy typically include controlling inflation, managing employment levels, and stabilizing the currency.

By influencing the money supply, monetary policy can affect lending rates for both consumers and businesses. For instance, by decreasing interest rates, a central bank can encourage borrowing and investing, which can stimulate economic growth. Conversely, increasing interest rates can help to cool down an overheating economy and curb inflation.

This concept is essential for understanding how central banks play a vital role in managing economic stability and growth through systematic intervention in financial markets.