Fiscal Policy v. Monetary Policy | DataDrivenInvestor
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If you want to understand taxes, inflation, spending and interest rates, you should know the difference between fiscal policy and monetary policy and the advantages and disadvantages of each.
The emerging problem with inflation and the probable response of hiking interest rates reminds me of watching congressional hearings on the prime rate when I was in grad school studying economics at Georgetown University. It saddened me to watch a businessman testifying and alternately yelling and crying because he couldn’t afford working capital loans any longer. This was a grown man. At that time, the prime rate had peaked to nearly 20%, and since most bank loans are prime +2, he was probably paying at least 22% interest on his loans. With tears streaming down his fleshy face, he implored congress to do something about it. They couldn’t, of course, because a reduction in interest rates only comes from the Federal Reserve.
I empathized with that guy. I was going to grad school on a fellowship, but had to take out school loans to pay for my very expensive Washington D.C. living expenses. My super-duper low interest rate school loan was something like ten or twelve percent. I have credit cards today with a lower rate than that.
Back to present day. It drives me crazy when I see people complaining about inflation without even understanding where inflation comes from and how to combat it. Like the guy mentioned above, many people confuse monetary policy and fiscal policy, what they do, how they work, and who enacts them. I’m going to explain that. For you. And me. So I don’t have to be annoyed.
Monetary Policy
What is it? Monetary Policy consists of a set of tools that any nation’s central bank has available to promote sustainable economic growth by making key decisions about interest rates and controlling the overall supply of money that is available to the nation’s banks, its consumers, and its businesses.
Who’s in charge? Monetary Policy in the U.S. is enacted by the Federal Reserve System, or the FED for short. It is not, I repeat not, implemented by Congress.
