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Glossary

  1. Board of Governors: A group of seven members, operating in Washington, DC, appointed by the President and confirmed by the Senate to control the Federal Reserve System.
  2. Central Bank: The main monetary authority of a country.
  3. Check Clearing: One of the functions of the Federal Reserve. The system of moving the funds of a person writing a check to the person receiving the check.
  4. Depository Institution: Any institution that accepts deposits and loans money to the public, which includes commercial banks, savings and loan associations, and credit unions.
  5. Discount rate: The amount of money the Fed charges member banks for loans. For just a moment, forget the word “discount” because this word may confuse you. Now, reread the definition without that word. You may now realize that the lower rate charged to member banks for loans will lead to a lower rate charged to us when we go to the bank for a loan. The opposite is true if the Fed is combating inflation.
  6. Excess Reserves: The amount of funds held by an institution in excess of required reserves.
  7. Federal Funds Rate: The rate member banks charge other member banks for overnight loans, like Regions borrowing from Wells Fargo to meet the reserve requirement, for instance. The rate charged is influenced by what occurred in the Open Market Operations. Some textbooks do not regard this as a fourth tool, but others do. This rate is extremely significant because this borrowing between banks occurs more often than when a bank borrows money from the Fed itself. Think of it this way: When you become an adult and need to borrow money, it may be easier to ask your siblings for the loan rather than your parents.  In fact, if a bank does borrow from the Fed, the Fed is likely to monitor the bank more closely about its banking practices.
  8. Federal Open Market Committee (FOMC): The twelve member committee of the Federal Reserve that meets eight times a year to set the monetary policy for the nation.
  9. Federal Reserve Act: The act passed in 1913 that created the Federal Reserve System.
  10. Federal Reserve Bank: The system of 12 districts throughout the United States responsible for payment services, supervising and regulating member banks, distributing the nation's currency and serving as the fiscal agent for the federal government.
  11. The Federal Reserve System: The central bank for the United States; also known as "The Fed".
  12. Liquidity: The measure of how quickly an asset can be converted into cash without loss of value.
  13. M1, M2, M3: Differing measures of parts of the money supply, that vary based on their decreasing liquidity.
  14. Monetary Policy: The Federal Reserve's actions that influence the money supply, the cost of money and credit.
  15. Nominal Interest Rate: The current interest rate, established by the Federal Reserve.
  16. Open Market Operations is conducted daily and occurs when the Fed chooses to either buy bonds or sell bonds to large institutional banks.
    1. The way to remember how this tool works is to think that “buy” is “purchase” which “pumps” money into the economy. The more money the banks have, the less expensive it is, the easier it is for consumers and businesses to borrow and spend. This expansionary policy will help get the economy out of a recession.
    2. The way to remember how this tool works it to think that “sell” means “soak” which takes money out of the economy. The less money the banks have, the more expensive it is, the harder it is for consumers and businesses to borrow and spend. This contractionary policy will help get the economy out of inflation. 
    The verbs buy and sell will ONLY make sense to you if you remember the subject of the action is the Fed.  If you think that you or the banks are buying and selling, you will get confused. The Fed buys bonds in the Open Market and the Fed sells bonds in the Open Market.
  17. Real Interest Rate: Interest rate adjusted for inflation.
  18. Required Reserve Ratio: The percentage of liabilities a depository institution must set aside from customer deposits
  19. Reserve requirement: is the amount of money the Fed requires member banks to keep in their vaults. Since 1992, the reserve requirement has been 10%. So for every $1,000 deposit, the bank has to keep $100 in reserve and can lend out the remaining excess reserves of $900. The Fed could lower this requirement if the economy needs expanding (money becomes more plentiful, less expensive, easier to borrow, easier to spend) or vice-versa if needed to fight inflation.
  20. US Treasury Securities: Bills, Notes or Bonds issued by the US Department of the Treasury in amounts of at least $1,000.