Monetary Policy Definition, Tools, and Goals

What is Monetary Policy?

By Matthew Frankel, CFP – Updated Apr 29, 2026 at 2:47 AM EST

Key Points

Fed's tools include adjusting interest rates and buying securities to control money supply.
Monetary policy aims to balance inflation and employment, adapting to economic needs.
Investors should note Fed's policy changes can directly impact market conditions and rates.

Monetary policy is the actions taken by a central bank to promote economic growth, stabilize prices, and control the money supply. In the United States, monetary policy is set by the Federal Reserve.

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Interest Rate

An interest rate is the cost of borrowing money or the premium you get for lending money. Learn how interest rates affect the economy.

When the Federal Reserve is buying long-term securities on the open market, the goal is to create downward pressure on interest rates and boost economic activity. In the case of the financial crisis aftermath, the near-zero federal funds rate wasn’t having the desired economic effect all by itself, so the Fed decided large-scale open market purchases were the best way to go.

Open market operations are also used to control the federal funds rate. The FOMC will set a target range for the benchmark interest rate (4.75% to 5.00%, for example) and will use open market operations to manipulate the actual rate within this range.

Reserve requirements

The Federal Reserve is authorized to create reserve requirements for banks and other financial institutions. Higher reserve requirements are considered to be tighter monetary policy.

To be sure, this is not an exhaustive list of the tools the Federal Reserve has available to create monetary policy, but they are some of the most effective and frequently used.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst specializing in the real estate and financial sectors. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, Globe St, The National Desk, and other TV networks and publications for his real estate, financial, stock market, and investing expertise.

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