Expansionary Monetary Policy
What Is Expansionary Monetary Policy?
Expansionary monetary policy is central-bank action aimed at stimulating economic activity, typically during a downturn or period of weak growth. Its most familiar form is cutting the federal funds rate, which the Fed generally uses as its primary tool for stimulating a weak economy. The Fed can also ease by buying securities through open market operations, and, when rates are already near zero, by using unconventional tools like quantitative easing - which AP Macroeconomics classifies as an unconventional expansionary policy tool. All of these lower borrowing costs and increase the money and credit available, encouraging households and businesses to spend and invest.
Why It Matters
Expansionary policy is how the Fed cushions the economy against recessions and rising unemployment. Clear historical examples include the emergency response to the 2008 financial crisis, when the FOMC cut its target to 0%-0.25% and launched quantitative easing, and the March 2020 pandemic response, when it again cut to near zero and committed to open-ended asset purchases. The goal in each case was to make credit cheap and plentiful enough to keep spending and hiring from collapsing. The main risk is overdoing it: too much stimulus for too long can push inflation above the Fed's 2% target, which is exactly the pressure the Fed then has to unwind with tighter policy.