Glossary: Monetary Policy Terms
This glossary defines the essential terms you'll encounter when following Federal Reserve communications and monetary policy developments. Terms are alphabetized for quick reference.
Balance Sheet — The Fed's assets (Treasury securities, mortgage-backed securities) and liabilities (currency, bank reserves); currently approximately $7 trillion as of late 2024.
Beige Book — A Federal Reserve report published eight times per year summarizing anecdotal economic conditions across the twelve Federal Reserve districts.
Dot Plot — A chart showing each FOMC participant's projection for the appropriate fed funds rate at year-end for the next several years; the median dot often serves as the market's focal point.
Dovish — A policy stance or communication that emphasizes supporting economic growth and employment, typically associated with lower interest rates or continued accommodation.
Dual Mandate — The Federal Reserve's two statutory objectives: maximum employment and price stability (interpreted as 2% inflation).
Effective Federal Funds Rate (EFFR) — The volume-weighted median interest rate at which banks lend reserves to each other overnight; the actual rate that trades within the Fed's target range.
Fed Funds Rate — The interest rate at which depository institutions lend reserve balances to other depository institutions overnight; the Fed's primary policy rate.
Fed Funds Target Range — The range (typically 25 basis points wide) within which the Federal Reserve aims to keep the effective federal funds rate; currently set at each FOMC meeting.
FOMC (Federal Open Market Committee) — The Fed's policy-making body, consisting of the seven Board of Governors members and five of the twelve regional Fed presidents (on a rotating basis), which sets the fed funds target.
Forward Guidance — Communication about the likely future path of monetary policy, used to influence market expectations and longer-term interest rates before policy changes occur.
Hawkish — A policy stance or communication that emphasizes controlling inflation, typically associated with higher interest rates or tighter policy.
IOER (Interest on Excess Reserves) — The interest rate the Fed pays banks on reserve balances held above required levels; now replaced by IORB (Interest on Reserve Balances) as reserve requirements were eliminated.
IORB (Interest on Reserve Balances) — The interest rate the Fed pays on all reserve balances held by banks at Federal Reserve Banks; serves as the primary tool for keeping the fed funds rate within the target range.
Liftoff — The first interest rate increase following a period of near-zero rates; used to describe the start of a tightening cycle.
Median Dot — The middle projection in the dot plot; often used as a shorthand for the Committee's central tendency forecast for the policy rate.
Minutes — The detailed record of FOMC meeting discussions, released three weeks after each meeting, providing insight into the range of views and debates among participants.
Neutral Rate (r)* — The theoretical interest rate that neither stimulates nor restrains economic growth when the economy is at full employment and stable inflation; estimated around 2.5-3% nominal.
ON RRP (Overnight Reverse Repurchase Agreement Facility) — A Fed facility where eligible counterparties (money market funds, GSEs, banks) lend cash to the Fed overnight in exchange for Treasury securities; sets a floor under short-term interest rates.
Open Market Operations (OMOs) — The Fed's buying and selling of securities (primarily Treasuries and agency MBS) to implement monetary policy and manage reserve levels.
PCE (Personal Consumption Expenditures) Price Index — The Fed's preferred inflation measure, which tracks changes in prices paid by consumers; the core PCE (excluding food and energy) is the primary gauge for the 2% target.
Policy Rate — The interest rate directly controlled by a central bank to implement monetary policy; for the Fed, this is the federal funds rate.
QE (Quantitative Easing) — Large-scale asset purchases by the Fed to lower long-term interest rates and stimulate the economy when the policy rate is near zero.
QT (Quantitative Tightening) — The reduction of the Fed's balance sheet by allowing securities to mature without reinvestment (runoff), which removes reserves from the banking system.
Runoff — The process of reducing the Fed's balance sheet by not reinvesting the proceeds when securities mature; the Fed sets monthly caps on Treasury and MBS runoff amounts.
SEP (Summary of Economic Projections) — Quarterly forecasts released by FOMC participants showing their projections for GDP growth, unemployment, inflation, and the appropriate policy rate path.
SRF (Standing Repo Facility) — A Fed facility that provides overnight repo financing to primary dealers and eligible banks, serving as a ceiling on short-term interest rates.
Statement — The official FOMC announcement released after each meeting, typically 400-500 words, describing the policy decision and economic assessment.
Taper — The gradual reduction in the pace of asset purchases during a QE program; the Fed tapered before fully ending purchases in late 2021.
Terminal Rate — The peak policy rate expected in a tightening cycle; market estimates for the terminal rate shift based on inflation and growth expectations.
Term Premium — The additional yield investors demand for holding longer-term bonds instead of rolling over short-term securities; reflects duration risk and uncertainty about future rates.
Yield Curve — A graph plotting interest rates across different maturities (typically 3-month to 30-year for Treasuries); its shape signals market expectations for growth, inflation, and policy.
This glossary is updated as new terms emerge in Fed communications. For deeper coverage of specific topics, see related articles on FOMC mechanics, forward guidance, and policy transmission.
Related: Federal Reserve Dual Mandate Explained | How the FOMC Sets the Fed Funds Target | Forward Guidance and Dot Plots