Angie · learn
Monetary policy
The central bank setting the price of money to manage inflation and employment. Its main transmission into markets is the discount rate.
Updated 2026-09-05
Monetary policy is the central bank adjusting the price and availability of money to manage inflation and employment. Its principal tool is the fed funds rate, supplemented by buying or selling assets outright.
For an investor it is best understood as the thing that sets the discount rate for every asset at once. Cutting rates lowers the hurdle every investment has to clear and raises the present value of every future cash flow. That is why markets react so violently to central bank language, and why the reaction is often larger than the actual change.
See also
- Fed funds rate — The overnight rate banks charge each other, targeted by the Federal Reserve. It is the short end of the curve every other rate is priced from.
- Inflation — The rate at which money loses purchasing power. It raises interest rates, which raises discount rates, which lowers every valuation at once.
- Fiscal policy — Government taxing and spending, as distinct from what the central bank does. It moves demand directly rather than through the price of credit.
- Risk-free rate — The 10-year Treasury yield, standing in for the return available with essentially no risk. Every other rate in the model is built on top of it.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
