Glossary
Essential terms and definitions for understanding Federal Reserve policy and the U.S. economy.
Basis Point (bps)
One hundredth of a percentage point (0.01%). A 25 basis point rate hike means the rate increased by 0.25%.
Beige Book
A Federal Reserve report published 8 times a year summarizing current economic conditions across the 12 Federal Reserve Districts, based on anecdotal information from business contacts and other sources.
Bond
A debt security where the issuer owes the holder a debt and is obligated to pay interest (coupon) and/or repay the principal at a later date (maturity). U.S. Treasury bonds are a key tool in Fed policy.
Consumer Price Index (CPI)
A measure of the average change in prices paid by urban consumers for a basket of goods and services. It is the most widely cited measure of inflation.
Contractionary Policy
Monetary policy aimed at slowing economic growth and reducing inflation, typically by raising interest rates and reducing the money supply. Also called 'hawkish' policy.
Deflation
A sustained decrease in the general price level. While lower prices may seem beneficial, deflation can lead to reduced spending (as consumers wait for lower prices), falling wages, and economic stagnation.
Discount Rate
The interest rate charged by the Federal Reserve to commercial banks and other depository institutions for loans received through the Fed's discount window (lending facility).
Dot Plot
A chart published quarterly by the Fed showing where each FOMC member expects the federal funds rate to be at the end of each of the next few years and in the longer run.
Dual Mandate
The Federal Reserve's two congressionally mandated objectives: maximum employment and stable prices (targeting 2% inflation as measured by PCE).
Expansionary Policy
Monetary policy aimed at stimulating economic growth, typically by lowering interest rates and increasing the money supply. Also called 'dovish' policy.
Federal Funds Rate
The interest rate at which depository institutions lend reserve balances to each other overnight. It is the Fed's primary policy rate and influences all other interest rates in the economy.
Fiscal Policy
Government decisions about spending and taxation that affect the economy. This is set by Congress and the President, NOT the Federal Reserve. Fiscal and monetary policy can work together or at cross purposes.
FOMC (Federal Open Market Committee)
The monetary policy-making body of the Federal Reserve. It consists of 12 members: the 7 Board of Governors and 5 Reserve Bank presidents (rotating). It meets 8 times per year.
Forward Guidance
Communication from the Fed about its likely future policy actions. By signaling their intentions, the Fed can influence financial conditions even before taking action.
Hawkish vs. Dovish
Hawks favor tighter monetary policy (higher rates) to control inflation. Doves favor looser policy (lower rates) to support employment and growth. These terms describe both individual policymakers and overall policy stances.
Inflation
A sustained increase in the general price level of goods and services, reducing purchasing power. The Fed targets 2% annual inflation as measured by the PCE price index.
IORB (Interest on Reserve Balances)
The interest rate the Fed pays on balances that depository institutions hold at Federal Reserve Banks. It is now the primary tool for steering the federal funds rate.
Liquidity
The ease with which an asset can be converted to cash without significantly affecting its price. The Fed often acts as a 'lender of last resort' to provide liquidity during financial stress.
Money Supply (M1, M2)
M1 includes the most liquid forms of money (cash, checking deposits). M2 includes M1 plus savings deposits, money market funds, and small CDs. The Fed influences the money supply through its policy tools.
NAIRU
Non-Accelerating Inflation Rate of Unemployment. The theoretical unemployment rate below which inflation is expected to rise. Currently estimated around 4.0-4.5%.
Open Market Operations
The buying and selling of government securities by the Fed in the open market to influence the money supply and interest rates. This is the Fed's most frequently used policy tool.
PCE (Personal Consumption Expenditures)
The Fed's preferred measure of inflation. It is broader than CPI and accounts for changes in consumer behavior (substitution effects) as prices change.
Quantitative Easing (QE)
An unconventional monetary policy where the Fed purchases large quantities of longer-term securities to lower long-term interest rates and increase the money supply when short-term rates are near zero.
Quantitative Tightening (QT)
The process of reducing the Federal Reserve's balance sheet by allowing securities to mature without reinvesting the proceeds, effectively removing money from the financial system.
Recession
A significant decline in economic activity lasting more than a few months. Commonly (but not officially) defined as two consecutive quarters of negative GDP growth. The NBER officially declares recessions.
Reserve Requirements
The fraction of deposits that banks are required to hold in reserve. Since March 2020, reserve requirements have been set to zero, making them a non-binding policy tool.
Stagflation
An economic condition characterized by simultaneous high inflation, high unemployment, and stagnant economic growth. This is particularly challenging for the Fed because its tools to fight one problem may worsen the other.
Tapering
The gradual reduction of the Fed's asset purchases (QE). Tapering signals a shift toward tighter policy and can significantly move financial markets.
Treasury Securities
Debt instruments issued by the U.S. government. T-bills (< 1 year), T-notes (2-10 years), and T-bonds (20-30 years). They are considered virtually risk-free and are central to Fed operations.
Yield Curve
A graph showing interest rates (yields) of bonds with equal credit quality but different maturity dates. A normal curve slopes upward; an inverted curve (short-term rates higher) has historically predicted recessions.
Zero Lower Bound
The point at which short-term interest rates reach zero or near-zero, limiting the Fed's ability to stimulate the economy with conventional rate cuts. This led to the development of QE and other unconventional tools.
31 terms • Educational reference only