How does the central bank control money in the economy?

Monetary policy is a tool that central banks use to control the money supply and influence economic growth. If you invest in crypto, you need to know –央bank decisions can drastically change your portfolio.

Two fundamentally different approaches

When the央bank “opens the tap” — expansionary policy

Generally, monetary policy can be aimed at expanding the economy.央bank lowers interest rates and pumps money into the system. The goal is simple — people take cheap loans, spend, invest. The economy accelerates.

Take an example: the USA in 2008. When everything was collapsing, the Federal Reserve sharply lowered rates and launched quantitative easing (QE) — effectively buying government bonds by the billions. Result? Money flooded in, loans became cheaper, people started buying homes and cars again. The economy revived.

When the央bank “closes the tap” — restrictive policy

The opposite tactic —央bank raises rates and reduces the money supply. This is done when inflation is rising and prices are no longer affordable.

In the early 1980s, the Federal Reserve raised rates to break the record-high inflation in the US. Loans became more expensive, people spent less, companies invested less. Inflation fell, but unemployment temporarily increased. A kind of “bitter medicine.”

Monetary policy is not fiscal policy

People often confuse these two concepts. Here’s the difference:

Monetary policy —央bank manipulates interest rates and the money supply. It can react quickly.

Fiscal policy — the government manages taxes and spending. It’s costly and slow, requiring approval in parliament.

Monetary policy is a universal tool — it affects the entire economy. Fiscal policy is often targeted at specific sectors — preferences can be given to technologies or agriculture.

Why does crypto react to央bank?

Here’s where it gets interesting. Monetary policy isn’t about cryptocurrencies, but it affects them seriously.

When the央bank “gives out money”

Expansionary policy — low rates, lots of cash. People have extra money and look for riskier assets. Bitcoin, Ethereum — they scare but also attract. Result? People buy crypto, prices soar.

2020-2021 were exactly such scenarios.央bank worldwide practically distributed money, and the crypto market exploded.

When the央bank tightens the belt

Restrictive monetary policy is bad news for crypto investors. Higher rates, less excess money, people tighten their belts to pay mortgages and loans. Does crypto get affected?

In 2022,央banks started raising rates to curb inflation. Crypto plunged — Bitcoin fell from 60,000 to 16,000. People simply didn’t have excess funds for risky investments.

What directly influences央bank?

When央bank changes monetary policy, it impacts three key things:

1. Cost of loans — affects whether it’s reasonable to take a credit
2. People’s available income — more or less money in pockets
3. Interest rates — deposits and bonds become more attractive or dull

All of this indirectly pulls crypto. When央bank makes investments profitable and safe (restrictive policy), crypto seems risky. When央bank makes money cheap (expansionary), people flock to crypto.

The main thing to know

Monetary policy is a system of央bank decisions regarding the money supply and rates. It comes in two types — expansionary ( when央bank pushes the economy forward) and restrictive ( when央bank cools down overheating).

For crypto investors, it’s important to understand because央bank decisions often predict market trends months ahead. When央bank signals easing monetary policy, investors expect crypto growth. When央bank tightens and pulls the reins, the crypto market gets nervous.

So, keep an eye on央bank statements — they are one of the strongest signals for your portfolio.