Inflation 101

Monetary policy primer

The Federal Reserve is responsible for making sure there is enough money and credit to support economic growth, but not so much that our dollar loses its purchasing power. This is the core of monetary policy.

The goals of monetary policy–maximum employment and price stability—were given to the Federal Reserve by Congress and are known as the Fed’s dual mandate. These goals mean that we want as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.

Price stability can be thought of as an inflation rate low enough and predictable enough that it doesn’t play a big role when firms and consumers are making financial decisions. Take, for example, a business that is considering whether to enter into a long–term contract with a supplier. If this business is confident enough about the general level of prices in the future, it can make the decision more easily knowing it will get a fair deal both now, and later. With confidence in the likely inflation rate, employers can give raises without fear, layoffs are fewer because businesses remain profitable, and employment gets closer to its maximum level.

People need the same confidence to do their longer-term planning, such as for retirement, and for deciding when to make big purchases. Having confidence in both price stability and job security encourages people to act now instead of waiting until there are fewer uncertainties.