What is the difference between monetary policy and fiscal policy, and how are they related?
Monetary policy refers to the actions of central banks, including the Federal Reserve, to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of a national government. In the U.S., fiscal policy decisions are determined by Congress and the Administration; the Fed plays no role in determining fiscal policy.
The U.S. Congress established maximum employment and price stability as the macroeconomic objectives for the Fed; they are referred to as the Fed's dual mandate. Apart from these overarching objectives, Congress determined that operational conduct of monetary policy should be free from political influence. As a result, the Fed is an independent agency of the federal government.
The Federal Open Market Committee (FOMC), which meets eight times per year to discuss and review economic and financial developments, determines the appropriate stance of monetary policy. In reviewing the economic outlook, the FOMC considers how the current and projected paths for fiscal policy might affect key macroeconomic variables such as gross domestic product growth, employment, and inflation. In this way, fiscal policy has an indirect effect on the conduct of monetary policy through its influence on the aggregate economy and the economic outlook.