Monetary Policy: The Federal Reserve

Monetary Policy v. Fiscal Policy

  • Fiscal policy: The government’s tax, spending, and debt policies, which influence the level, composition, and distribution of national output and income.
  • Monetary policy: The strategy of influencing changes in the money supply and interest rates to affect output, employment, and inflation.  The Federal Reserve System conducts monetary policy in the United States.

The Fed

  • Federal Reserve System: The central bank of the United States. The Federal Reserve is responsible for conducting the nation’s monetary policy and overseeing credit conditions.
  • Federal Open Market Committee: The group within the Federal Reserve System that determines the stance of monetary policy. The open-market desk at the Federal Reserve Bank of New York implements that policy with open-market operations (the purchase or sale of government securities), which influence short-term interest rates–especially the federal funds rate–and the growth of the money supply. The committee is composed of 12 members, including the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and a rotating group of four of the other 11 presidents of the regional Federal Reserve Banks.

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Background