Monetary Policy

Monetary policy is the control of the money supply (and sometimes credit conditions) to achieve or satisfy macroeconomic goals.

Fed’s monetary tools:
Open market operations

• buying Treasuries in the repo market injects money into markets and thus lowers Fed Funds rate

Buying Treasuries in the repo market => injects money => lowers Fed Funds rate

Discount rate

• lowering this rate makes it more attractive for banks to borrow money from Fed

Reserve requirements

• lower required reserve ratio make more funds available for lending, used rarely

Verbal persuasion

• used often, to persuade bank to tighten their credit policies
  

Note:

• Open market operations & discount rate methods are most commonly used