Monetary policy is the set of central-bank actions intended to influence the cost and availability of credit, aggregate demand, and inflation. The main instrument is the policy interest rate, supported by reserve management, asset purchases, and communication.

Monetary policy works through interest rates, credit conditions, asset prices, expectations, and the exchange rate. Its effects are indirect and depend on the structure of the financial system.[1]

Policy rules, such as the Taylor rule, provide a framework for relating the policy rate to inflation and economic activity, but central banks retain discretion in practice.[2]

Sources

  1. Board of Governors of the Federal Reserve System. How Does Monetary Policy Work?. Federal Reserve. 2026. View source Accessed Nov 11, 2026.
  2. Taylor, John B.. Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy. 1993. View source Accessed Nov 11, 2026.