previousnext   APPENDIX 2
GLOSSARY

agreement corporation A corporation chartered by a state to engage in international banking and foreign investment and business transactions. They are so named because the corporation enters into an "agreement" with the Board of Governors to limit its activities to those permitted an Edge Act corporation. See also Edge Act corporations .

a priori Before; prior; precedent to; known or assumed beforehand.

auction Method by which prices and interest rates are determined.

automated clearinghouse (ACH) Electronic clearing and settlement system for exchanging electronic transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private-sector firms.

autonomous Independent; generated from outside the model. See also exogenous.

bank holding company (BHC) Company that owns, or has controlling interest in, one or more banks. A company that owns more than one bank is known as a multibank holding company. (A bank holding company may also own another bank holding company, which in turn owns or controls a bank; the company at the top of the ownership chain is called the top holder.) The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (the Comptroller of the Currency or the Federal Deposit Insurance Corporation).

bank supervision Oversight of individual banks to ensure that they are operated prudently and in accordance with applicable statutes and regulations.

bankers acceptance Negotiable time drafts, or bills of exchange, that have been accepted by a bank which, by accepting, assumes the obligation to pay the holder of the draft the face amount of the instrument on the maturity date specified. Bankers Acceptance's are generally used to finance the export, import, shipment, or storage of goods.

bill A short-term direct obligation of the U.S. Treasury with maturities of 13, 26, or 52 weeks; sold on a discount basis only. See also Treasury bill, T-bill, and cash management bill. Compare with note and bond.

Board of Governors Central, governmental agency of the Federal Reserve System, located in Washington, DC, and composed of seven members who are appointed by the President and confirmed by the Senate. The Board is responsible for domestic and international economic analysis; with other components of the System, for the conduct of monetary policy; for supervision and regulation of certain banking organizations; for operation of much of the nation's payments system; and for administration of most of the nation's laws that protect consumers in credit transactions.

bond A long-term obligation with a maturity in excess of 10 years; interest is paid periodically, based upon the coupon rate. See also corporate bond, municipal bond, Treasury bond, and T-bond. Compare with bill and note.

book-entry One form in which Treasury and certain government agency securities are held. Book-entry form consists of an entry on the records of the U.S. Treasury Department, a Federal Reserve Bank, or a financial institution. No actual certificate is sent to the owner of the security. The record of your ownership resides on computer.

book-entry securities Securities that are recorded in electronic records, called book entries, rather than as paper certificates. Ownership of U.S. government book-entry securities is transferred over Fedwire.

budget authority The authority provided by law to incur financial obligations that result in immediate or future outlays involving government funds or to collect offsetting receipts.

budget deficit/surplus A budget deficit occurs when government outlays exceed government receipts; a surplus occurs when receipts exceed outlays. The budget deficit was $221.2 billion in 1986. The last year in which a budget surplus was recorded was 1969 ($3.2 billion). After 29 years of deficits, the FY 1998 budget recorded a surplus of $70 billion, the largest single surplus in U.S. history.

capital market The informal network of dealers and investors through which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded. Capital market securities generally are less liquid securities that mature in more than one year.

capital market rates Rates paid on securities with maturities in excess of one year. See also dividends and long-term interest rates.

cash management bill (CMB)

central bank The principal monetary authority of a nation. A central bank performs several key functions, including issuing currency and regulating the supply of credit in the economy. The Federal Reserve is the central bank of the United States. See also Federal Reserve System.

ceteris paribus Holding everything else constant.

certificate of deposit (CD) A time deposit at a bank or savings institution. A time deposit cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Usually, Large CDs of $100,000 or more are in negotiable form. In other words, large CD's can be sold or transferred among holders before maturity.

commercial bank (CB) A type of financial institution that offers a broad range of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banks and brokerage firms, which are generally involved in securities transactions.

commercial paper Short-term unsecured debt issued by highly credit-worthy corporations in their own name; maturities extend up to 270 days, just shy of the SEC 9-month requirement for registration.

commodity prices An index of commodities (such as oil and steel) traded in worldwide markets.

competitive bidders One of two categories of bidders on Treasury securities who compete for allotments of Treasury securities by submitting bids. Competitive bidders are usually financial institutions. Compare with noncompetitive bidders.

congressional bill (S. = Senate Bill; H.R. = House Bill) A legislative proposal before Congress. Bills from each house are assigned a number in the order in which they are introduced, from the beginning of each Congress (first and second sessions). "Public bills" deal with general questions and "private bills" deal with individual matters such as claims against the Government.

congressional document codes

congressional report (S. Rpt. = Senate Report; H. Rpt. = House Report) A document setting forth a committee's explanation of its action regarding legislation referred to it. House and Senate reports are assigned a number which includes the number of the Congress during which they are published, i.e., H. Rpt. 103-40 refers to a report created in the House during the 103d Congress. Conference reports are numbered and designated in the same way as regular House and Senate Reports. Most reports favor a bill's passage although a bill can be reported without recommendation. When a committee report is not unanimous, the dissenting committee members may file a statement of their views, called Minority Views and referred to as a Minority Report. A reported version of a bill will include language referencing the applicable report number.

congressional resolutions

contractionary fiscal policy A policy to decrease governmental expenditures and/or to increase taxes, which results in a larger surplus or a smaller deficit. See also fiscal policy.

contractionary monetary policy See also monetary policy.

corporate bond A bond issued by a corporation.

corporate security A security issued by a private sector corporation. See also corporate bond and commercial paper.

coupon rate The annual rate of interest to be paid by a bond issuer until maturity. The coupon rate is usually fixed and tends to be higher among bonds with longer maturities and lower credit ratings.

coupon payment The annual amount of interest to be paid by a bond issuer until maturity. It is equal to the coupon rate times the face value of the bond.

credit union (CU ) A type of financial institution which is organized as a cooperative by individuals who have a common bond, such as a place of employment, residence, or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings, and use their funds mainly to provide consumer installment loans to members.

cyclical unemployment Unemployment caused by a low level of aggregate demand associated with recession in the business cycle.

data limitations In stabilization policy, refers to two types of limitations:

  1. quantitative factual information or data that is only available after the event (e.g., unemployment figures for last month);

  2. the raw information that is adjusted for seasonal variations or changes in prices; therefore, data may not accurately measure the activity.

decision-making lag The time it takes for policy makers to decide on an appropriate policy measure or course of action.

deficit The amount each year by which government spending is greater than government income.

demand deposit A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.

deposit ceiling rates of interest Maximum interest rates that can be paid on savings and time deposits at federally insured commercial banks, mutual savings banks, savings and loan associations, and credit unions. The National Credit Union Administration establishes the ceilings on credit union deposits. The Depository Institutions Deregulation Committee (DIDC) establishes the ceilings on deposits held by the other depository institutions. Under current law, deposit interest rate ceilings are being phased out over a six-year period, ending in 1986 under the oversight of the DIDC.

depository institution A type of financial institution that obtains its funds mainly through deposits from the public. Includes commercial banks, savings and loan associations, savings banks, and credit unions.

direct deposit A method of payment which electronically credits your checking or savings account.

discount payment The difference between the face value and the price paid for a security.

discount rate The interest rate at which eligible depository institutions may borrow funds, usually for short periods, directly from the Federal Reserve Banks. The law requires the board of directors of each Reserve Bank to establish the discount rate every 14 days subject to the approval of the Board of Governors.

discount window Descriptive term for Federal Reserve facility for extending credit directly to eligible depository institutions (those with transaction accounts or nonpersonal time deposits).

duration A measure of a bond's price sensitivity to interest rate changes, expressed in years. For example, the price of a bond with a five-year duration would move up or down about five percent for every one percent change in interest rates. Typically, bonds with shorter durations have performed better in rising interest rate environments, while bonds with longer durations have performed better when interest rates decline.

economic growth An change in the nation's production of goods and services. Economic growth may be either positive (expansion) or negative (contraction).

economic shocks Events that impact the economy, come from outside it, are unexpected and unpredictable (e.g., Hurricane Andrew in 1991, the rise in oil prices by OPEC).

Edge Act corporation A corporation chartered by the Federal Reserve to engage in international banking and foreign investment and business transactions. These corporations are subsidiaries either to bank holding companies or other banks. They are named after Senator Walter Edge of New Jersey, who sponsored the original legislation to permit formation of such organizations. The Board of Governors acts on applications to establish Edge Act corporations and also examines the corporations and their subsidiaries. See also agreement corporation.

effectiveness lag The time it takes for the full impact of the policy to become effective. See also impact lag.

electronic funds transfer (EFT) Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.

employment rate The percentage of the labor force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy. See also unemployment rate.

endogenous Dependent; generated within the model. See also induced.

equilibrium real interest rate The rate that would be consistent with the full employment of labor and industrial capacity, and with real GDP being at its long-run potential level. This rate is needed as a benchmark to judge whether a given real interest rate is expansionary or contractionary.

ex ante Planned; intended. Compare with ex post.

excess reserves The amount of reserves held by a financial institution in excess of its required reserves and required clearing balances. See also reserves.

execution lag The time it takes to get the selected policy measure into operation.

exogenous Independent; generated from outside the model. See also autonomous.

expansionary fiscal policy A policy to increase governmental expenditures and/or to decrease taxes, which results in a smaller surplus or a larger deficit. See also fiscal policy.

expansionary monetary policy See also monetary policy.

expected rate of inflation The public's expectations for inflation. These expectations determine how large an effect a given policy action by the Fed will have on economic activity.

ex post Actual; realized. Compare with ex ante.

Federal Deposit Insurance Corporation (FDIC) An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying, monitoring, and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and provision of financial services.

federal funds Reserve balances that depository institutions lend each other, usually on an overnight basis. In addition, Federal funds include certain other kinds of borrowings by depository institutions from each other and from federal agencies. Federal funds borrowings are not collateralized.

federal funds rate The interest rate at which banks borrow surplus reserves and other immediately available funds. The federal funds rate is the shortest short-term interest rate, with maturities on federal funds concentrated in overnight or one-day transactions.

Federal Open Market Committee (FOMC) A twelve-member committee made up of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. The FOMC meets eight times a year to set objectives for the growth of money and credit, which are implemented through purchases and sales of U.S. government securities in the open market. At its meetings, the FOMC votes on open market strategies and tactics to accomplish its monetary goals. The FOMC also establishes policy relating to System operations in the foreign exchange markets.

Federal Reserve Act of 1913 Federal legislation that established the Federal Reserve System.

Federal Reserve District Bank One of the twelve operating arms of the Federal Reserve System, located throughout the nation, that together with their twenty-five Branches carry out various System functions, including operating a nationwide payments system, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies, and serving as banker for the U.S. Treasury.

Federal Reserve District (also "Reserve District," or "District") One of the twelve geographic regions served by a Federal Reserve Bank.

Federal Reserve note A debt obligation of the Federal Reserve System. Nearly all of the nation's circulating paper currency consists of Federal Reserve notes printed by the Bureau of Engraving and Printing and issued to the Federal Reserve Banks which put them into circulation through commercial banks and other depository institutions.

Federal Reserve System (FRS) The central bank of the United States, created by Congress and made up of a seven-member Board of Governors in Washington, DC, twelve regional Federal Reserve Banks, and their twenty-five Branches.

Fedwire An electronic funds transfer network operated by the Federal Reserve. Fedwire is usually used to transfer large amounts of funds and U.S. government securities from one institution's account at the Federal Reserve to another institution's account. It is also used by the U.S. Department of the Treasury and other federal agencies to collect and disburse funds.

fiscal agency services Services performed by the Federal Reserve Banks for the U.S. government. These include maintaining deposit accounts for the Treasury Department, paying U.S. government checks drawn on the Treasury, and issuing and redeeming savings bonds and other government securities.

fiscal policy Government policy regarding taxation and spending designed to promote maximum employment, maximum economic growth, price stability, and a sustainable pattern of international transactions. The magnitude and direction of the federal government's budget deficit or surplus determine whether the fiscal policy is expansionary or contractionary. The primary tools of fiscal policy include changes in government expenditures, changes in tax rates, changes in the tax base, and changes in tax credits. Fiscal policy is made by Congress and the Administration. See also contractionary fiscal policy and expansionary fiscal policy .

fiscal year The federal government's fiscal year begins Oct. 1 and ends Sept. 30 of the next calendar year; so fiscal year 1998 began Oct. 1, 1997, and ends Sept. 30, 1998.

foreign currency operations The purchase or sale of the currencies of other nations by a central bank for the purpose of influencing foreign exchange rates or maintaining orderly foreign exchange markets. Also called foreign-exchange market intervention.

foreign exchange rate The price of the currency of one nation in terms of the currency of another nation.

frictional unemployment Short-term unemployment associated with mobility. A person who leaves a job to find something better is considered frictionally unemployed. This type of unemployment characterizes workers subject to seasonal work (e.g., construction, agricultural, winter recreational workers, etc.).

funds rate See federal funds rate.

Full Employment and Balanced Growth Act of 1978 Federal legislation that, among other things, specifies the primary objectives of U.S. economic policy--maximum employment, stable prices, and moderate long-term interest rates. See Humphrey-Hawkins Act.

function (=) Two or more things are functionally related; direction; cause and effect; one thing depends on another.

government securities Securities issued by the U.S. Treasury or federal agencies.

gross domestic product (GDP) The total market value of all final goods and services newly produced in the economy in a given time period. GDP may be expressed in terms of product--consumption, investment, government purchases of goods and services, and net exports--or in terms of income earned--wages, interest, and profits. GDP is equal to GNP less net factor income from abroad.

gross national income (GNI) The total value of all income received by a country's factors of production less two non-income charges (capital consumption allowance and indirect business taxes). It is equal to GNP.

gross national product (GNP) The total market value of a nation's output of final goods and services (annualized). It is equal to GNI.

Humphrey-Hawkins (Full Employment and Balanced Growth) Act of 1978 (15 U.S.C. § 3101, et seq.), from the names of the act's original sponsors. See Full Employment and Balanced Growth Act of 1978.

identity (identity) Two or more things are equal because they have been so defined; no direction; no cause and effect.

impact lag The time it takes for the full impact of the policy to become effective. See also effectiveness lag.

implementation lag The time it takes for policymakers to implement a new policy once they recognize that an economic condition requires corrective action. The implementation lag has two component lags: the decision-making lag and the execution lag. See also decision-making lag and the execution lag.

induced Dependent; generated within the model. See also endogenous.

inflation A rate of increase in the general price level of all goods and services. (This should not be confused with increases in the prices of specific goods relative to the prices of other goods.)

inflationary expectations The rate of increase in the general price level anticipated by the public in the period ahead.

interest payments The return expressed in monetary units (dollars) earned by lenders.

intergovernmental expenditure/revenue Amounts paid to or received from other governments either in the form of shared revenues and grants-in-aid, as reimbursements for performance of general government activities or for specific services such as care of prisoners for the paying government, or in lieu of taxes.

intermediate targets An intermediate target is a variable (such as the money supply) that is not directly under the control of the central bank, but that does respond fairly quickly to policy actions, is observable frequently, and bears a predictable relationship to the ultimate goals of policy. It must be met if the ultimate goals are to be achieved.

issue date The date when a refund payment is issued on a Treasury Security representing the difference between the investment amount and the purchase price, as determined at auction.

lender of last resort As the nation's central bank, the Federal Reserve has the authority and financial resources to extend credit to depository institutions or to other entities. This lending usually takes place in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.

long-term interest rates Interest rates on loan contracts--or debt instruments such as Treasury bonds or utility, industrial, or municipal bonds--having maturities greater than one year. See also capital market rates.

market interest rate A rate of interest paid on deposits and other financial instruments, which is determined by the interaction of the supply of and demand for funds in financial markets.

matched sale-purchase agreement (MSP) A matched sale-purchase agreement is when the Federal Reserve sells a security outright for immediate delivery to a dealer or foreign central bank, with an agreement to buy the security back on a specific date (usually within 7 days) at the same price. Matched sale-purchase agreements allow the Federal Reserve to withdraw reserves on a temporary basis. Compare with repurchase agreement.

maturity The length of time until the amount of the loan or bond is to be repaid. Maturities can range from one day to 30 years.

member bank A depository institution that is a member of the Federal Reserve System. All federally chartered banks are automatically members of the System. State-chartered banks are divided into those that are members of the System (state member banks) and those that are not (nonmember banks).

monetary policy Government policy regarding monetary aggregates and interest rates designed to promote maximum employment, maximum economic growth, price stability, and a sustainable pattern of international transactions. The magnitude and direction of the monetary aggregates and interest rates determine whether the monetary policy is expansionary or contractionary. The primary tools of monetary policy include open market operations, discount policy, and reserve requirements. Monetary policy is made by the Federal Reserve through its FOMC. See also contractionary monetary policy and expansionary monetary policy.

money A generalized claim on all other assets, good both now and in the future. Its functions include a unit of account (Measurement of value), medium of exchange, a store purchasing power, and standard of deferred payment. See also money stock and money supply.

money market The informal network of dealers and investors over which short-term debt securities are purchased and sold. Money market securities generally are highly liquid securities that mature in less than one year, typically in less than ninety days. Compare with capital market.

money market certificate A certificate of deposit in a minimum denomination of $10,000 with a maturity of six months. The interest rate on money market certificates is related to the yield on six-month Treasury bills, in accordance with regulations issued by the Depository Institutions Deregulation Committee.

money market rate See short-term interest rate.

money stock That asset or group of assets which is set aside to function as money. See also money supply.

money supply That asset or group of assets which is set aside to function as money. See also money stock .

municipal securities Bonds which are issued by state and local governments and their authorities.

mutatis mutandis Everything changing together or simultaneously.

mutual savings bank (MSB ) A type of financial institution historically engaged primarily in accepting consumer savings deposits and in originating and investing in securities and residential mortgage loans. Today, MSBs offer a variety of checking and savings deposits, which earn periodic interest, and make a wider range of loans.

natural output The level of real GDP that can be sustained in the long run and that is consistent with constant inflation. See also potential output .

natural rate of unemployment The rate of unemployment that can be sustained in the long run, and that is consistent with constant inflation.

National Credit Union Administration (NCUA ) An independent federal agency that supervises and insures both federal and state-chartered credit unions. NCUA is entirely funded by credit unions and receives no tax dollars.

negotiable order of withdrawal (NOW Account ) An interest earning account on which checks may be drawn. Withdrawals from NOW accounts may be subject to a 14-day or more notice requirement although such is rarely imposed. NOW accounts may be offered by commercial banks, mutual savings banks, and savings and loan associations. NOW accounts may be owned only by individuals and certain nonprofit organizations and governmental units.

nominal interest rates The current stated rate of interest paid or earned.

noncompetitive bidders One of two categories of bidders on Treasury securities, who do not get their allotments of Treasury securities by submitting bids. Rather, noncompetitive bidders receive the average price and investment yield of the accepted competitive bids. Noncompetitive bidders are usually individuals, but may also be financial institutions. Compare with competitive bidders .

nonmember bank A depository institution that is not a member of the Federal Reserve System. Specifically, a state-chartered commercial bank that has elected not to join the System.

note A medium-term obligation; maturities extend from 2-10 years; interest is paid at a pre-arranged fixed rate. See also Treasury note and T-note . Compare with bill and bond .

off-budget/on-budget Some presentations in the federal budget distinguish on-budget totals from off-budget totals. On-budget totals reflect the transactions of all federal government entities except those excluded from the budget totals by law, the two Social Security trust funds (old-age and survivors insurance and the federal disability insurance trust funds), and the Postal Service fund. Off-budget totals reflect the transactions of government entities excluded from the on-budget totals by law.

Office of the Comptroller of the Currency (OCC ) An independent bureau of the Treasury Department and the oldest federal financial regulatory body. The OCC oversees the nation's federally chartered banks and promotes a system of bank supervision and regulation that: promotes safety and soundness by requiring that national banks adhere to sound management principles and comply with the law; and encourages banks to satisfy customer and community needs while remaining efficient competitors in the financial services market.

offsetting collections Collections by the government from the public that result from the business-type or market oriented activities and collections; examples include proceeds from the sale of electric power by the Tennessee Valley Authority, voluntary medical insurance premiums paid to the supplementary medical insurance trust fund, and the sale of postage stamps.

open market operations Purchases and sales of government and certain other securities in the open market by the Domestic Trading Desk at the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the depository system and foster expansion in money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. They are used to promote either higher or lower growth in money and credit and to offset undesired changes in the reserve positions of depository institutions stemming from movements in currency, float, Treasury deposits, and other factors.

operating targets Short-term goals which are directly affected by policy instruments and which must be met if the intermediate goals are to be achieved.

outlays Budget outlays are expenditures and net lending of funds under budget authority during the fiscal year. They constitute the spending side of the budget and are compared to receipts in calculating the budget surplus or deficit.

over the counter (OTC ) Figurative term for the means of trading securities that are not listed on an organized stock exchange such as the New York Stock Exchange. Over-the-counter trading is done by broker-dealers who communicate by telephone and computer networks.

par value The full face value of a security.

pari passu Equitably; ratably; without preference; no priority.

payments system A collective term for the mechanisms (both paper-backed and electronic) which move funds, payments, and money among financial institutions throughout the nation. The Federal Reserve plays a major role in the nation's payments system through distribution of currency and coin, processing of checks, electronic transfer of funds, and the operation of automated clearinghouses that transfer funds electronically among depository institutions; various private organizations also perform payments system functions.

policy lags The time lags in the policy-making process; refers to the periods between an undesirable economic event and the impact of the economic policy to correct it. See decision-making lag , effectiveness lag , execution lag , impact lag , implementation lag , recognition lag , and time lags .

potential output The level of real GDP that can be sustained in the long run and that is consistent with constant inflation. See also natural output .

premium The amount by which the auction price of a bill, note, or bond is higher than its face value.

principal The face value of a bond. This amount will be repaid by the issuer at maturity.

principal payments The face amount or par value of a debt instrument on which interest is paid. The interest payment is not part of the principal.

productivity The amount of physical output for each unit of productive input. recognition lag The time it takes for policymakers to recognize the state of the economy.

real GDP GDP adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which is used as an indicator of the volume of the nation's output.

real interest rate An interest rate which has been adjusted for the expected erosion of purchasing power resulting from inflation. Technically defined as the nominal interest rate minus the expected rate of inflation.

receipts Budget receipts constitute the income side of the budget and are composed almost entirely of taxes or other compulsory payments to the government. They are compared to outlays in calculating the budget surplus or deficit.

recession A significant decline in general economic activity extending over a period of time. Generally identified as two (2) quarters of declining GNP. Official dating is done by the National Bureau for Economic Research.

recognition lag The time it takes for policy makers to recognize that an economic condition requires corrective action.

repurchase agreement (RP ) When the Federal Reserve makes a repurchase agreement with a government securities dealer, it buys a security for immediate delivery with an agreement to sell the security back at the same price by a specific date (usually within 15 days) and receives interest at a specific rate. This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed.

reserves Assets from which depository institutions are allowed to meet their reserve requirements. For member banks, reserve requirements are satisfied with holdings of vault cash and/or balances at the Federal Reserve Banks. Nonmember banks may hold their reserves in the same manner, or they may pass the reserve balances through a correspondent institution to the Federal Reserve Banks.

required reserves Funds that a depository institution is required to maintain as vault cash or on deposit with a Federal Reserve Bank against its deposit liabilities; required amount varies according to required reserve ratios set by the Board of Governors and the volume of reservable liabilities held by the institution.

required clearing balance Funds that a depository institution is required to maintain in an account at a Federal Reserve Bank, in addition to its required reserve balance, to ensure that it can meet its daily transaction obligations without overdrawing its required reserve account and thereby incurring a penalty. Required clearing balances earn credits that can be used to pay for services provided by the Federal Reserve.

required reserve balance Portion of its required reserves that a depository institution must hold in an account at a Federal Reserve Bank.

reserve requirements Ratios in which acceptable reserves must be held against customer deposits of banks and other depository institutions. The reserve requirement ratios affect the expansion of deposits that can be supported by each additional dollar of reserves. The Board of Governors sets reserve requirements within limits specified by law for all depository institutions (including commercial banks, savings banks, savings and loan associations, credit unions, some industrial loan banks, and U.S. agencies and branches of foreign banks) that have transaction accounts or nonpersonal time deposits. A lower reserve requirement allows more deposit and loan expansion and a higher reserve ratio permits less expansion.

savings and loan association (S&L ) Historically, a type of financial institution in which individuals held shares and received dividends on their share holdings from the interest earned on residential mortgage loans. Unlike credit unions, membership did not require a common bond. Today, S&Ls offer a variety of checking and savings deposits, which earn periodic interest, and make a wider range of loans.

Securities and Exchange Commission (SEC ) An independent, non-partisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. The purpose of these laws is to protect investors and to ensure that investors have access to disclosure of all material information concerning publicly traded securities. The Commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.

securities Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

short-term interest rates Interest rates on loan contracts--or debt instruments such as Treasury bills, bank certificates of deposit, or commercial paper--having maturities of less than one year. See also money market rates .

small saver certificate A certificate of deposit with a minimum maturity of 2 and 1/2 years offered by banks and thrift institutions to individuals. The interest rate on these certificates is related to the average yield on 2 and 1/2 year Treasury securities, in accordance with regulations issued by the Depository Institutions Deregulation Committee. There is no minimum denomination required on these certificates.

state member bank A bank that is chartered by a state and has elected to join the Federal Reserve System.

structural unemployment Long-term joblessness caused by shifts in the economy. Structural unemployment often occurs because of changes in technology.

tender An application or offer to purchase a U.S. Treasury Bill, Note, or Bond.

thrift institution A general term encompassing mutual savings banks, savings and loan associations, and credit unions.

time lags The time lags in the policy-making process; refers to the periods between an undesirable economic event and the impact of the economic policy to correct it. See decision-making lag , effectiveness lag , execution lag , impact lag , implementation lag , policy lags , and recognition lag .

total nonfinancial debt Includes outstanding credit market debt of federal, state, and local governments and of private nonfinancial sectors (including mortgages and other kinds of consumer credit and bank loans, corporate bonds, commercial paper, bankers acceptances, and other debt instruments).

total return The sum of a security's income (interest or dividends), plus any changes in its price, over a given period of time, usually expressed as a percentage.

The Trading Desk The trading desk at the New York Federal Reserve Bank, through which open market purchases and sales of government and federal agency securities are made. The desk maintains direct telephone communication with major government securities dealers. A "foreign desk" at the New York Federal Reserve Bank conducts transactions in the foreign exchange market.

transaction account A checking account or similar account from which transfers can be made directly to third parties. Demand deposit accounts, negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft accounts are examples of transaction accounts at banks and other depository institutions.

Treasury Direct Service A service provided to the U.S. Department of the Treasury whereby Federal Reserve Banks hold book-entry Treasury securities purchased by individuals.

Treasury Securities Interest-bearing obligations of the U.S. government, issued by the Treasury's Bureau of the Public Debt, as a means of borrowing money to meet government expenditures not covered by tax revenues. Marketable Treasury securities fall into three categories - bills, notes, and bonds. The Federal Reserve System holds more than $125 billion of these obligations, acquired through open market operations. Marketable Treasury obligations are currently issued in book entry form only; that is, the purchaser receives a statement, rather than an engraved certificate.

trust fund In the federal budget, a trust fund means only that the law requires that funds must be accounted for separately and used only for specified purposes. The largest trust funds are those for civil service and military retirement, social security, Medicare, and unemployment insurance. These are financed largely by social security taxes and contributions and payments from the general fund. There are also major trust funds for transportation and bank deposit insurance which are financed by user charges.

ultimate goals Major or principal goals; ultimate ends.

uncertain responses In stabilization policy, the situation when the reactions of individuals and businesses to a policy is not what policymakers predicted (e.g., a decrease in income tax rates that does not increase consumer spending).

unemployment rate The percentage of persons in the labor force that is actively seeking a job, but cannot find a job at the going wage rate.

user charges These are charges for services rendered, collected in the form of taxes, such as highway excise taxes to fund the highway trust fund.

vault cash Cash kept on hand in a depository institution's vault to meet day-to-day business needs, such as cashing checks for customers; can be counted as a portion of the institution's required reserves.

velocity The rate at which money balances turn over in a period for expenditures on goods and services (often measured as the ratio of GNP to the money stock). A larger velocity means that a given quantity of money is associated with a greater dollar volume of transactions; and, vice versa.

wire transfer Electronic transfer of funds; usually involves large dollar payments.

yield The rate of income earned from a security, expressed as a percentage. While the coupon rate on a bond is normally fixed, its yield will vary with changes in the bond's price. For example, if a $1,000 bond has a 7 percent coupon rate and is currently selling at $1,100, its yield would be 6.4 percent ($70 divided by $1,100 = 6.4 percent).

Websites

A Glossary of Payment Terms
Glossary of Financial Regulators and Institutions Terms

previoustopnext