Deep Dive: How Central Banks Control the Money Supply — From Interest Rates to Quantitative Easing
Central banks are the most powerful institutions in the global financial system, yet most investors only pay attention when the Federal Reserve announces a rate decision. Behind those headline-grabbing moments lies a sophisticated toolkit that central banks use to expand or contract the money supply — influencing everything from mortgage rates to stock valuations to the price of groceries. The Federal Reserve has cut its benchmark rate four times since September 2025, bringing the federal funds rate to 3.64% in January 2026 from 4.33% earlier that year. Meanwhile, the M2 money supply has grown to $22.41 trillion, the Fed's balance sheet sits at $6.61 trillion, and inflation has moderated to roughly 2.2% year-over-year. These numbers tell a story about how central bank decisions ripple through the economy — but understanding that story requires understanding the mechanisms behind them. This guide breaks down the three primary tools central banks use to control money supply, explains how each works in practice with real data from the current economic cycle, and examines why these mechanisms matter for investors navigating today's markets.