Key points
- Main tools: the policy interest rate, the balance sheet (QE and QT) and forward guidance.
- Aims to keep inflation low and stable and, in the US, to support employment.
- Can be changed faster than tax and spending policy.
Example
If the Fed signals rate cuts while shrinking its balance sheet via QT, markets may see easier policy on rates but tighter liquidity overall.
In history
After cutting rates to zero in 2008 and launching trillions in QE, the Fed pivoted to rapid hikes in 2022 to combat the post-pandemic inflation spike.
Related terms