Accomodating monetary policy

Posted by / 15-Nov-2020 02:00

The immediate result of cheap money is a boost in stock prices; in the medium term, cheap money promotes economic growth.

However, if cheap money remains in the economy for too long, it can lead to a situation in which there is a glut of currency or too many dollars chasing too few goods and services leading to inflation.

Accommodative monetary policy means a policy of allowing the money supply to rise in line with national income and the demand for money.

Accommodative monetary policy will also usually involve lower interest rates.

For this reason, most central banks alternate between policies of cheap money and tight money in varying degrees to encourage growth while keeping inflation under control.

The Federal Reserve policy of increasing the supply of money to make credit more readily available.

Accommodative monetary policy may also be known as ‘easy monetary policy’ / loose monetary policy.

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Considering the economic outlook and the fact that policy actions take time to affect the economy, the FOMC decided to increase its target range for the federal funds rate by 1/4 percentage point.

The stance of monetary policy remains accommodative after this increase in the sense that interest rates remain low enough to support further strengthening in labor market conditions and a return to 2 percent inflation.

To learn more about how the Committee's assessment of the economic situation, its outlook for the economy, and its current stance of monetary policy, read the Committee's postmeeting statement or meeting minutes here:

Inflation in the United States, Europe, and Japan continues to undershoot official targets.

Measures of the “natural” rate of interest consistent with normal economic conditions have been trending downward for years.

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A monetary policy in which a central bank sets low interest rates so that credit is easily attainable.