Business Glossary

Federal Reserve Board decisions on the money supply . To make the economy grow faster, the Fed can supply more credit to the banking system through its open market operations , or it can lower the member bank reserve requirement or lower the discount rate -which is what banks pay to borrow additional reserves from the Fed. If, on the other hand, the economy is growing too fast and inflation is an increasing problem, the Fed might withdraw money from the banking system, raise the reserve requirement, or raise the discount rate, thereby putting a brake on economic growth. Other instruments of monetary policy range from selective credit controls to simple but often highly effective moral suasion . Monetary policy differs from fiscal policy , which is carried out through government spending and taxation. Both seek to control the level of economic activity as measured by such factors as industrial production, employment, and prices.

actions by the federal reserve system to influence the cost and availability of credit, with the goals of promoting economic growth, full employment, price stability, and balanced trade with other countries. Through its monetary policy decisions, the Fed tries to regulate both interest rates and the nation's money supply . Monetary policy is carried out by the Federal Reserve Board (FRB) and the Federal Open Market Committee (FOMC) , the 12-member committee (including all 7 governors of the Federal Reserve Board), which directs the open market purchase and sale of government securities for the 12 Federal Reserve Banks. The Federal Reserve Board chairman appears before Congressional committees twice a year, in February and July, to report on Federal Reserve monetary policy objectives, as required by the 1978 Humphrey-Hawkins Act. These addresses are watched closely for indications of a change in monetary policy.

The Fed has at its disposal three distinct tools of monetary policy: the purchase or sale of securities through open market operations , its power to set financial institution reserve requirements , and the discount rate paid by banks and savings institutions when they borrow from one of the district Federal Reserve Banks. Monetary policy can be characterized as being either tight credit or easy credit. When the Fed is worried that the economy is growing too fast or prices are rising too rapidly, it tightens up reserve positions by selling government securities or allowing maturing securities to run off. This process is known as draining reserves. If, on the other hand, the Fed becomes concerned that the economy is not growing fast enough, or is headed into a recession, it can inject new reserves into the banking system by buying securities from securities dealers. By buying, instead of selling, securities, the Fed is expanding, rather than contracting the supply of bank reserves, thereby making it easier for banks to meet their reserve requirements and make new loans.

In addition to monetary policy, the Fed also has several selective credit controls regulating the cost of credit. These include the margin requirements on securities purchased through broker-dealers, and the highly effective moral suasion , whereby the Fed tries to persuade bankers to go along with its recommendations through informal pressure. Although monetary policy differs from the federal government's fiscal policy , carried out by its tax and spending policies, both share a common objective: balancing aggregate demand in the economy against aggregate supply, as measured by the gross national product, employment, and interest rates, thereby keeping inflation and unemployment under control.

See also monetarist , monetary base , operational targets , intermediate targets

federal regulation of the money supply through changing commercial bank reserve requirements and interest rates, thereby stimulating the economy or deflating the economy.

the efforts of a nation's central bank aimed at influencing inflation rates, economic growth, and interest rates by varying the supply of money. Contrast with fiscal policy .