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US Monetary Policy Economic policy dictates the lives of many people Economic regulation affects everyone if the economy falters then people lose money inflation runs rampant and unemployment rates rise Controlling US monetary policy or at least having some influence ranks high on the agenda of many political actors from the president and Congress to the private sector like the credit industry At the heart of US monetary policy is the Federal Reserve System The Federal Reserve controls the money supply to member banks and the interest rates that money can be lent and borrowed at They also can control the money supply through open market sales on a much smaller level but interest rates and reserve requirements are the big tools that the Federal Reserve uses to control the economy A basic explanation of the functions of the monetary policy tools is necessary at this point so the positions of the actors and political ideologies can be understood This purposes of these tools can best be explained by Paul Peretz Monetary policies determine the amount of money and credit that is available in a society When the amount of money and credit is reduced the price the borrowers have to pay for money the interest rate goes up When the money supply is increased the interest rate is driven down People borrow more when the interest rate is lower they use the borrowed money to purchase goods such as cars and houses and invest in machinery and factories Thus increasing the money supply stimulates the economy Of course beyond some point the economy can be overstimulated With more money in their pockets people bid up the prices of goods and the result is inflation Reducing the amount of money available to borrowers tends to depress the economy and slow inflation Peretz 267 This explanation however basic does not account for the minute margin of error involved in controlling the economy That is
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