Tight Monetary Policy


DEFINITION of 'Tight Monetary Policy'

A course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly, or to curb inflation when it is rising too fast. The Fed will "make money tight" by raising short-term interest rates (also known as the Fed funds, or discount rate), which increases the cost of borrowing and effectively reduces its attractiveness.

BREAKING DOWN 'Tight Monetary Policy'

The Fed can sell Treasuries on the open market in order to absorb some extra capital during a tight monetary policy. This effectively takes capital out of the open markets as the Fed takes in funds from the sale with the promise of paying the amount back with interest. The Fed will often look at tightening monetary policy during times of strong economic growth.

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  3. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  4. Operation Twist

    The name given to a Federal Reserve monetary policy operation ...
  5. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  6. Zero-Bound

    A situation that occurs when the Federal Reserve has lowered ...
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