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LogoutTight, or contractionary, monetary policy is a course of action adopted by a central bank, such as the Federal Reserve in the United States, to slow down economic growth, restrict expenditure in an economy that appears to be advancing too quickly, or contain inflation when it is increasing too quickly.
The Fed tightens monetary policy by changing the discount rate, commonly known as the federal funds rate, to raise short-term interest rates. The Fed may also use open market operations to sell assets on its balance sheet to the market . Expansionary monetary policy is the polar opposite of tightening monetary policy. The expansionary, or loose, policy aims to raise demand by using monetary and fiscal stimulation to stimulate the economy. QE is a technique for monetary policy expansion.
As a result, tapering denotes the reversal of one component of a loose monetary policy—QE—while tightening denotes the adoption of a tight monetary policy. The Fed’s asset purchases can be tapered off at the same time as an expansionary monetary policy program. Despite the fact that both tapering and tightening are supposed to have comparable impacts on market interest rates, they do not always occur concurrently.