Monetary vs. fiscal policy: How each works and their impact on the stock market

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How the two forces work together will determine where the economy and markets go next.

The Federal Reserve has grabbed a lot of attention the past couple of years and for good reason: Investors are pinning their hopes on the central bank's monetary policy to beat down inflation and softly land the red-hot U.S. economy. But another part of the economic equation — fiscal policy directed by the White House and Congress — is about to nab some of that spotlight as the fall presidential election approaches. First, let's define these two wonky terms.

This option is not as direct as simply changing the overnight rate, but it does impact the longer end of the yield curve, which is more important when it comes to longer-term financing, such as mortgages for homebuyers. More buying serves to pressure rates lower, thereby making mortgages more affordable and stimulating the demand for homes.

 

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