Monetary Policy

Monetary policy is the management of a currency's supply and the cost of borrowing by a central bank in pursuit of goals such as price stability and full employment. Its main tools are policy interest rates, asset purchases and sales, and communication about future intentions. Most major central banks, including the Federal Reserve, target inflation of about 2 percent per year.

Why it matters

Monetary policy determines the baseline conditions of every economy: what savers earn, what borrowers pay, and how fast the money supply grows. Its power is matched by its imprecision, since policy acts with long and variable lags on an economy observed through delayed statistics. The record includes clear successes, such as breaking the inflation of the 1970s, and clear failures, such as judging the 2021 inflation transitory before CPI reached 9.1 percent in June 2022. Note that a 2 percent target is not price stability in the literal sense; it is a policy of halving money's purchasing power roughly every 35 years, chosen deliberately as a buffer against deflation.

In the gold vs bitcoin debate

Gold and bitcoin are both, in essence, opt-outs from discretionary monetary policy. Gold's supply answers to geology and mining economics; bitcoin's follows a fixed schedule that could be recited today for the year 2100. Their shared pitch is that rules beat discretion over long horizons. The mainstream counter is that inflexible money cannot respond to crises, a flexibility whose value 2008 and 2020 demonstrated and whose costs the subsequent inflation and asset booms also demonstrated.