Monetary policy isn’t about interest rates. It’s about money. Specifically, it’s about the supply of money relative to the demand to hold it. But you wouldn’t know that from financial journalists’ constant focus on interest rates. Sentences like “The Federal Reserve lowered interest rates today”, or “Yesterday, the Fed debated whether to start raising interest rates” are all too common. They are also highly misleading.
Financial journalists usually focus on the federal (fed) funds rate. This is the rate banks charge each other for overnight loans. The Fed has a target for the fed funds rate as part of its monetary policy strategy. But the fed funds rate is not an instrument. That is, it’s not something the Fed directly controls. Rather, the Fed sets its federal funds rate target and then uses its instruments to push the federal funds rate towards its target. The federal funds rate might be thought of as a barometer for monetary policy. But it is not the substance of monetary policy.
