federal reserve

11 key economic terms defined

The Federal Reserve's Open Market Committee announcements and news reports about the committee frequently contain terminology that may not be familiar to many readers.

11 key terms
Here's a brief glossary to help you get through "Fed speak."
  1. Bias
  2. Discount rate
  3. Federal funds target rate
  4. Federal Open Market Committee, or FOMC
  5. Gross domestic product (GDP)
  6. Inflation
  7. Monetary policy
  8. Open market operations
  9. Personal Consumption Expenditure (PCE)
  10. Prime rate
  11. Reserve requirements

1. Bias

One tool the Fed has to fight inflation is loosening or tightening the reins on short-term interest rates. The Fed maintains a tightening bias if it perceives inflation to be a risk to the overall health of the economy. Similarly, it could maintain a loosening bias if the greater risk is a slowdown in economic growth. If the Fed believes a proper balance is being maintained, its bias is said to be neutral.

2. Discount rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve bank's lending facility -- the discount window.

3. Federal funds target rate

The short-term interest rate that banks charge other banks to borrow money overnight at the Federal Reserve. The actual rate, or effective rate, changes daily and may be above or below the targeted rate. The FOMC sets the rate at its regularly scheduled meetings but may opt to change it between meetings should economic conditions warrant a change.

4. Federal Open Market Committee, or FOMC

Consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the committee reviews economic and financial conditions, determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth.

5. Gross domestic product, or GDP

The market value of goods and services produced by labor and property in the United States. It is the primary measure of U.S. production.

 

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