Monetary Policy

Chart of the Week for September 17-23, 2004

Monetary policy refers to actions taken by the Federal Reserve, the nation’s central bank, to influence the amount of money available in the U.S. economy. These actions include setting bank reserve requirements, interest rates, and the discount rate (the rate at which banks borrow from the Fed). A decrease in rates is expected to increase money supply which in turn is expected to stimulate consumer spending. This increased demand should then stimulate business and industry production creating more jobs. The opposite is expected if rates are raised and money supply is ’tightened’.

As can be seen from the chart above, as the Fed continued to decrease the discount rate over the past several years, the money supply has continued to grow. Now that the Fed has started increasing the rates, the growth rate of money supply should theoretically start to slow. M2 Money Supply consists mainly of currency, savings and checking accounts, travelers checks, retail money market accounts and CDs less than $100,000.

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