Why is the Federal Reserve using a contractionary monetary policy?

Question

What is the monetary policy?

Answer 1

Monetary Policy is a tool that central bank used to control aggregate demand in an economy through real money balance..

The Fed use contractionary monetary policy to reduce the size of money supply (Fed increases interest rate/Fed rate).. It works through desire of people to save is bigger when interest is high, and they will decrease their consumption, hence, money supply is reduced.. Their purpose is to control inflation, especially demand-pull..

Answer 2

The federal reserve is the organization in the United States that is in charge of all monetary policy.  Monetary policy is the Federal Reserve's (Fed) actions that affect the money supply.  They have various tools at their disposal, including

Manipulating Reserve Requirements

Chaning the Discount Rate

Open-Market Operations (buying and selling bonds)

See http://en.wikipedia.org/wiki/Federal_Res... for all the information you will ever want on the Federal Reserve.

In the US, the Fed is currently seeking an expansionary monetary policy, as seen in it's several Rate cuts over the past year.  These rate cuts aim to increase the money supply.  An expansionary monetary policy looks to decrease unemployment, but a side effect is an increase in inflation.  There is no policy (fiscal or monetary) that can tackle both inflation and unemployment, it's an inverse relationship as shown in the short run by the phillips curve.  But the Fed is using expansionary policy to help keep the US out of a recession, or at least help to make it not as bad of one.  The business cycle is a positive sloping curve that has waves throughout.  The upward part of the wave represents an expansion in the economy, these are often seen to have increased inflation and decreased unemployment.  The downward part of the curve represents the contractions in the economy.  The Feds goal is to make this curve as straight as possible through monetary policy.  Hope this helps!