Monetary policy refers to the actions taken by central banks (like the Federal Reserve) to manage the money supply and influence interest rates in pursuit of economic objectives.
Key Tools
- Interest Rate Setting: Raising rates slows economic activity; lowering rates stimulates it
- Open Market Operations: Buying or selling government securities to inject or withdraw money
- Reserve Requirements: Setting the minimum reserves banks must hold
- Quantitative Easing (QE): Large-scale asset purchases to inject liquidity into the system
Impact on Gold
- Loose policy (low rates, QE): Generally bullish for gold as the money supply expands
- Tight policy (high rates): Can be bearish for gold in the short term, but if high rates indicate inflationary problems, gold may still rise
- Real interest rates: The most important variable — gold tends to rise when real rates are negative