Monetary Policy

In the United States, monetary policy is primarily conducted by the Federal Reserve, often referred to simply as the Fed. The Fed operates independently of the federal government but coordinates closely with the U.S. Department of the Treasury, which oversees fiscal policy.

The Federal Reserve's main objective is to promote maximum sustainable employment, stable prices (which typically means keeping inflation low and stable), and moderate long-term interest rates. It uses several tools to achieve these objectives:

• Open Market Operations: The Federal Reserve conducts open market operations by buying or selling U.S. Treasury securities in the open market. When it wants to increase the money supply and stimulate economic activity, it purchases Treasury securities, injecting cash into the banking system. Conversely, when it wants to reduce the money supply and cool down the economy, it sells Treasury securities, absorbing cash from the banking system.

• Discount Rate: The discount rate is the interest rate at which commercial banks can borrow funds directly from the Federal Reserve. By changing the discount rate, the Fed can influence the cost of borrowing for banks, which in turn affects overall lending rates in the economy. Lowering the discount rate encourages banks to borrow more, stimulating lending and economic activity, while raising it has the opposite effect.

• Reserve Requirements: The Federal Reserve sets reserve requirements, which are the amount of funds that banks must hold in reserve against certain deposits. By adjusting these requirements, the Fed can influence the amount of money banks have available to lend. Lowering reserve requirements increases the amount of money banks can lend, while raising them reduces lending capacity.

The Federal Reserve works closely with the U.S. Department of the Treasury, especially during times of economic crisis or when implementing unconventional monetary policy measures. For example, during the 2008 financial crisis, the Fed collaborated with the Treasury to implement programs such as the Troubled Asset Relief Program (TARP) and various liquidity facilities to stabilize financial markets and support economic recovery.

While the Federal Reserve focuses on monetary policy, the Treasury Department manages fiscal policy, which involves decisions related to government spending, taxation, and borrowing. Although monetary and fiscal policy are distinct, they often work together to achieve broader economic goals. For instance, during periods of economic downturn, the Fed might implement accommodative monetary policy while the Treasury increases government spending or cuts taxes to stimulate demand and support economic growth.

See r*, Monetary Policy, LIBOR, SOFR, Swaps, and Repo.

See also History of Banking Regulation in the USA.