I’m not going to tire you with a thousand-word essay on the significance monetary policy plays within the world of macro.

I’m sure you can find many better-written papers from central banks and professors. My goal here is to get all the information across to you as fast, and in as few words as possible.

So here’s how I broke down such a complex tool into a concept an 11-year-old could understand.

Monetary Policy Broken Down:

Simply put, monetary policy is a tool used by central banks around the world to control how much money is in circulation and how much it costs to borrow capital from banks.

Therefore, central banks like the Federal Reserve and Bank of England have two mandates; low/stable inflation of 2% and maximum employment, a sign of good economic conditions.

You following?

Good.

Here’s a great visual representation of how interest rates, (governed by central bank monetary policy decisions) affect the wider-scale economy.

https://embed.notionlytics.com/wt/ZXlKd1lXZGxTV1FpT2lKaU5qRmxOalF3WlRnMFpXVTBaVFV4T1dKbFl6azBOVEk1TlRSbU5UY3hZU0lzSW5kdmNtdHpjR0ZqWlZSeVlXTnJaWEpKWkNJNklqTmFhMGg1U1RWeU5FZFlWR1YwYUZsemNYcFhJbjA9

If you’re like me, this is a simple, yet beautiful flowchart which shows the domino effect from interest rates to money markets (liquid markets <12 months maturity) and the wider economy.

But the question still arises.

• Why do you need to know what this means if you’re a currency trader, equities trader or commodity trader?

Simple.

Your trade setup regardless of how amazing always has a factor of risk involved right? Adding the understanding of macro, for this example if the Fed is meeting on Wednesday for an interest rate decision understanding the possibilities at hand reduces your level of exposure to the unknown.