Central banks and monetary policy

CBDC

A central bank digital currency - a digital form of sovereign money issued directly by the central bank, unlike commercial bank deposits.

The design question is disintermediation: if households can hold central bank money directly, deposits may drain from commercial banks in a stress.

CUTS

Rate cuts: reductions in a central bank's policy interest rate, intended to make borrowing cheaper and support demand.

Markets price the expected path rather than a single move, so the number of cuts expected over the next year usually matters more than any one decision.

DEPOSIT

Money placed with a bank, which the bank owes back to the customer on demand or at an agreed date.

A deposit is a liability of the bank and an asset of the customer, and the bank lends most of it out. US insurance covers $250,000 per depositor, per bank, per ownership category, which is the number that mattered in the 2023 bank failures.

DISCOUNT

A reduction from a reference price; in valuation, the rate used to convert future cash flows into present value.

The discount rate is where most of the disagreement in a valuation hides - small changes move the answer far more than the cash-flow forecast does.

DOVISH

The opposite of hawkish: prioritising growth and employment, and so favouring lower rates or looser policy.

The hawk and dove labels describe a lean rather than a fixed camp - the same official may shift as the data changes.

EASING

Loosening monetary policy to support activity - cutting rates, or buying assets once rates are already near zero.

Quantitative easing works on longer-term yields by purchasing bonds directly, when cutting short rates further is no longer available.

FOMC

The Federal Open Market Committee - the body within the US Federal Reserve that sets monetary policy.

Meets roughly eight times a year. Minutes are published three weeks later and are parsed closely for dissent.

HAWKISH

Describing a policymaker or stance that prioritises controlling inflation, and so favours higher interest rates or tighter policy.

Markets parse central bank language for shifts in tone. A statement read as more hawkish than expected typically lifts short-term yields immediately.

HIKE

An increase in a central bank's policy interest rate.

What matters to markets is usually the path implied for future meetings rather than the single move being announced.

INTERVENTION

Official buying or selling of a currency by a government or central bank to influence its exchange rate.

It works best when coordinated across countries and aligned with policy. Acting alone against a trend driven by interest rate differences usually buys time rather than changing direction.

MINUTES

The detailed account of an FOMC meeting, published three weeks after the decision.

They describe the range of views without naming individuals, so they reveal how close the vote was and what would change it. Markets sometimes reprice on a phrase buried in them.

PLAZA

The Plaza Accord of 1985, an agreement among the United States, Japan, West Germany, France and the United Kingdom to weaken the dollar through coordinated intervention.

The dollar fell sharply over the following two years. The episode is cited in every modern discussion of currency intervention, usually as evidence of what coordination can do and how rarely governments now attempt it.

REPO

Short for repurchase agreement: selling a security and agreeing to buy it back shortly afterward at a slightly higher price. It functions as a short-term secured loan.

The repo market funds much of the trading in government bonds. When repo rates spike, it usually signals that cash or collateral has become scarce, which is why central banks watch it closely.

SEIGNIORAGE

The profit a government earns from issuing currency - the difference between a unit of money's face value and what it costs to produce.

For physical notes the margin is large. It also describes revenue a state raises by creating money, which at the extreme becomes an inflation tax.

A $100 note costs a few cents to print. The government can't book that gap as profit, because currency is a liability of the central bank. The central bank does earn interest on the securities it buys with newly issued currency, and it sends most of that income to the Treasury. In normal times the amount is modest. In a currency collapse it grows very large and works like a tax on everyone holding the currency.

SELIC

Brazil's benchmark policy interest rate, set by the central bank's monetary policy committee.

Brazil moved early and aggressively in the post-pandemic inflation cycle, and the Selic became a reference point for how fast an emerging market can raise rates to defend its currency and prices. ## Government, tax and regulation

SYMPOSIUM

The Jackson Hole Economic Policy Symposium, hosted each August by the Federal Reserve Bank of Kansas City.

Central bankers and academics gather in Wyoming, and the chair's speech is watched for policy signals. Several framework changes were previewed there before becoming official.

TAPER

Gradually reducing the pace of a central bank's asset purchases, slowing stimulus rather than reversing it.

The 2013 'taper tantrum' - a sharp yield spike after the Federal Reserve merely signalled a future slowdown in purchases - is why subsequent tapers were telegraphed far in advance.

TIGHTENING

Central bank policy that restrains activity - raising rates or shrinking the balance sheet - usually to bring inflation down.

Acts with a lag often estimated at a year or more, which is why policymakers must act on forecasts rather than on current data.