federal reserve

11 key economic terms defined

6. Inflation 

The upward spiraling of the prices of goods and services, most often rising out of sync with consumer purchasing power. The Fed looks at overall inflation as it's measured by the consumer price index, or CPI, and at core inflation, which is the CPI minus food and energy prices.

7. Monetary policy 

Action undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The three tools of monetary policy are open market operations, reserve requirements and the discount rate.

8. Open market operations 

Open market operations are the Federal Reserve's principal tool for implementing monetary policy, which is achieved by purchasing and selling U.S. Treasury and federal agency securities. The short-term objective for open market operations is specified by the Federal Open Market Committee, or FOMC. This objective can be a desired quantity of reserves or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

9. Personal Consumption Expenditure, or PCE 

A measure of the goods and services purchased by consumers.

10. Prime rate 

The interest rate banks charge their best customers, meaning businesses. It is almost always 3 percent above the federal funds target rate. Banks set this rate based on loan demand and other factors.

11. Reserve requirements 

The amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

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