How does the Federal Reserve determine monetary policy?

The Federal Reserve determines monetary policy primarily by managing interest rates, which is a critical tool used to influence economic activity. By adjusting the federal funds rate, the interest rate at which banks lend to each other overnight, the Fed can influence broader interest rates, such as those for mortgages, loans, and savings. Lowering interest rates tends to stimulate economic growth by making borrowing cheaper, encouraging spending and investment, while raising rates can help cool down an overheating economy by making borrowing more expensive.

Through changes in interest rates, the Federal Reserve aims to control inflation and stabilize the currency, which are key objectives of its monetary policy. This approach contrasts with other mechanisms, such as trade agreements, government spending controls, or fiscal budgets, which fall under the purview of different branches of government or economic policy. The Fed’s focus on interest rates allows it to respond dynamically to economic changes, promoting either growth or stability as needed.