How does the Federal Reserve most commonly influence monetary policy?

The Federal Reserve most commonly influences monetary policy by adjusting interest rates. This is a fundamental tool in monetary policy that affects the overall economy. When the Federal Reserve raises interest rates, borrowing costs increase for consumers and businesses, which tends to slow down economic activity. Conversely, when the Fed lowers interest rates, borrowing becomes cheaper, encouraging spending and investment, which can help stimulate economic growth.

This process plays a vital role in controlling inflation and stabilizing the economy. By influencing the cost of borrowing, the Federal Reserve can directly impact consumer behavior and business investment, thus guiding the economy toward desired outcomes such as full employment and price stability.

In this context, the other choices represent different mechanisms of economic influence but do not pertain directly to the Federal Reserve's primary tools. Changing tax rates and government spending are typically the responsibilities of fiscal policy, managed by Congress and the Executive branch, while regulating trade agreements falls under international trade policy, which is also outside the purview of the Federal Reserve's mandate.