What is fiscal policy? How it differs from monetary policy

Washington —Fiscal policy is the government’s use of spending and taxation to influence the economy; in the United States it is set by Congress and the President through budgets, appropriations and tax law. Monetary policy is the separate job of the Federal Reserve, which steers the economy mainly by setting a target for short-term interest rates.

The two are often discussed together because both affect growth, jobs and inflation, and because they meet in the bond market: when the government spends more than it collects, it borrows, and the cost of that borrowing depends on interest rates the Fed influences but does not fully control.

What is the difference between fiscal and monetary policy?

The simplest distinction is who decides and which tools they use. Fiscal policy works through the government’s own budget. Monetary policy works through the price and availability of money and credit.

• Who sets it: fiscal policy is set by elected officials in Congress and the White House; monetary policy is set by the Federal Open Market Committee, the Fed’s rate-setting body, which holds eight scheduled meetings a year.
• Main tools: fiscal policy uses spending programs, tax rates, tax credits and deductions; monetary policy uses the target range for the federal funds rate and the size and makeup of the Fed’s balance sheet.
• Goals: fiscal policy pursues whatever priorities lawmakers choose, from defense to health care to investment incentives; the Fed pursues a dual mandate of maximum employment and stable prices, with a 2 percent inflation goal.
• Speed: the Fed can change rates at a single meeting; tax and spending changes usually require legislation and can take months or years to pass and phase in.

Fiscal policy can also be aimed at specific parts of the economy in a way interest rates cannot. Treasury’s November 2 economy statement to its borrowing advisory committee credited provisions of the Working Families Tax Cuts, including full expensing of research and development and 100 percent bonus depreciation for business equipment, with contributing to rapid growth in business investment. The same statement said the federal government’s contribution to third-quarter GDP growth surged, reflecting more national defense spending.

What is the federal deficit?

A deficit occurs when the federal government spends more than it collects in revenue over a fiscal year, which runs from October 1 to September 30. When revenue exceeds spending, the result is a surplus. According to the Treasury Department, the federal budget has run a surplus four times in the last 50 years, most recently in 2001, and the terms national deficit, federal deficit and U.S. deficit mean the same thing.

The size of the deficit reflects both policy choices and the state of the economy. Treasury notes that when households and businesses earn less, tax collections fall; when the economy is doing well, they rise. Spending can move just as sharply in a downturn. From fiscal 2019 to fiscal 2021, federal spending rose by about 50 percent in response to the COVID-19 pandemic, according to Treasury, while revenue increased from approximately $3.5 trillion to $4 trillion.

How is the national debt different from the deficit?

The deficit is a one-year shortfall; the national debt is the running total. To cover deficits, the Treasury sells bills, notes and bonds to investors. The national debt is the accumulation of that borrowing, and each new deficit adds to it. Because the government must pay interest on what it owes, a larger debt raises spending on interest, which in turn adds to future deficits.

The debt is reported in two main pieces. Debt held by the public is owed to outside investors, including foreign buyers, banks, funds and the Federal Reserve. Intragovernmental holdings are amounts one part of the government owes another, such as trust funds.

How do fiscal and monetary policy affect each other?

The overlap is most visible in Treasury’s borrowing. The Fed sets a target range for the overnight rate banks charge each other, which anchors short-term Treasury bill yields. Longer-term yields, which determine what the government pays to borrow for 10 or 30 years, are set by investors and reflect expectations for inflation, growth and the supply of government debt.

Treasury manages that borrowing through quarterly refunding announcements that set the size of its note and bond auctions. In its November 4 statement, Treasury said it is monitoring the Fed’s purchases of Treasury bills for its portfolio, known as the System Open Market Account, alongside private demand.

“In considering any changes, Treasury will be guided by the objective of financing the government at the lowest cost over time.”

The two policies can also pull in different directions. Heavy government spending in a strong economy can add to demand at a time when the Fed is trying to slow inflation, which may require higher interest rates than otherwise. Higher rates then raise the government’s interest bill.

Where do the deficit, debt and rates stand now?

The figures below are as of early November 2026 and will change; the sources named are updated daily or monthly.

• Deficit: the government ran a deficit of $1.99 trillion in fiscal 2026, which ended September 30, on receipts of $5.40 trillion and outlays of $7.40 trillion, according to the Monthly Treasury Statement. That was about $217 billion, or 12 percent, larger than the $1.78 trillion deficit in fiscal 2025.
• Debt: total public debt outstanding was $40.55 trillion on November 4, of which $32.77 trillion was held by the public and $7.79 trillion was intragovernmental holdings, according to Treasury’s Debt to the Penny data.
• Fed policy: on October 28 the Fed held the federal funds target range at 3.75 percent to 4 percent by a 10-2 vote, with Lisa Cook and Beth Hammack preferring a quarter-point increase. The statement said inflation remains elevated. The effective fed funds rate was 3.88 percent on November 4, according to Federal Reserve data via FRED.
• Treasury yields: as of mid-afternoon New York time on November 5, the 13-week bill yielded 3.987 percent, the 10-year note 4.837 percent and the 30-year bond 5.251 percent.
• Borrowing: Treasury is offering $125 billion of 3-year, 10-year and 30-year securities next week to refund about $97 billion of maturing debt, raising about $28 billion in new cash.

The gap between the effective fed funds rate and the 10-year yield, close to 1 percentage point, shows the limits of the Fed’s reach: it steers overnight rates, but the government’s long-term borrowing costs are priced by the market.

What should readers watch next?

• Treasury auctions of 3-year notes on November 9, 10-year notes on November 10 and 30-year bonds on November 12.
• The Monthly Treasury Statement for October, the first month of fiscal 2027.
• The Fed’s next policy meeting, December 8-9, which includes updated economic projections.
• Treasury’s next quarterly refunding announcement, scheduled for February 3, 2027.