Contractionary Monetary Policy

Volcker Shock

The Federal Reserve's significant increase of federal funds rate to a peak of 20% from 11% between 1980-1982.

Federal funds rate

The interest rate at which banks lend reserve balances to other depository institutions overnight.

Monetary tightening

A policy employed by central banks to reduce inflation by raising interest rates and reducing the money supply.

Reserve requirements

The minimum amount of reserves a bank must hold against deposits, as mandated by a central bank.

People's Bank of China

The central bank of China responsible for implementing monetary policy in the country.

Quantitative Tightening (QT)

A form of monetary policy that involves reducing the amount of liquidity in the economy by decreasing the central bank's balance sheet.

Bank of England (BOE)

The central bank of the United Kingdom that manages monetary policy and issues currency.

Quantitative Easing (QE)

An unconventional monetary policy used by central banks to stimulate the economy by buying financial assets.

Monetary Policy Normalization

The process of returning to a state of normal monetary policy after a period of quantitative easing or other stimulus measures.

Interest Rate Hikes

An increase in the central bank's policy interest rate when tightening monetary policy.

European Central Bank (ECB)

The central bank for the Eurozone responsible for monetary policy within the member countries.

Asset purchases

Actions taken by a central bank to buy financial assets to increase the money supply and lower interest rates.

Reserve Bank of Australia (RBA)

The central bank of Australia responsible for formulating monetary policy and issuing currency.

Peak interest rate

The maximum rate set by a central bank, beyond which it will not go, aimed at controlling inflation.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Central bank

The national bank that provides financial and banking services for its country's government and commercial banking system.

Balance Sheet

A financial statement that summarizes a company's or bank's assets, liabilities, and equity at a specific point in time.

Market interest rates

The interest rates that are determined by the supply and demand for credit in the marketplace.

Future interest rate hikes

Signals given by central banks regarding potential increases in interest rates to manage inflation.

Incremental rate hikes

Small, gradual increases in interest rates typically employed to adjust monetary policy without causing market disruption.

Tightening monetary policy

The process of reducing the money supply and increasing interest rates to curb inflation.

Economic stimulus

Policy measures undertaken by a government to encourage economic growth, often through lowering interest rates or increasing government spending.

Chairman Volcker

Paul Volcker, former chairman of the Federal Reserve credited with reducing inflation in the late 1970s and early 1980s.

Normalization of monetary policy

The process of returning to standard interest rates and economic conditions following a period of extraordinary measures.

Raising interest rates

An action taken by central banks to increase their policy interest rates in response to inflation or economic growth.

Reserve balances

The amount of money that banks hold in reserves at the central bank.

Reducing balance sheet

The process of a central bank selling off its assets to decrease its monetary base.

Economic conditions

The overall state of the economy, reflecting aspects like employment, inflation, and growth.

Inflation targeting

A monetary policy strategy where a central bank aims to maintain a specific inflation rate.

Growth outlook

An assessment of the future direction of economic growth, which can influence policy decisions.

Liquidity in the economy

The availability of liquid assets to a market or company, influencing its ability to meet short-term obligations.

Asset purchases reversal

The act of a central bank selling financial assets to influence monetary conditions.

Monetary policy decisions

Choices made by central banks regarding the money supply and interest rates aimed at achieving economic objectives.

Economic growth

An increase in the production of goods and services in an economy over time.

Inflation-adjusted rates

Interest rates adjusted to remove the effects of inflation, reflecting the true cost of borrowing.

Market stabilization

Efforts or policies implemented to maintain market equilibrium during volatile conditions.

Fiscal policy

The use of government spending and taxation to influence the economy.

Short-term interest rates

Interest rates on financial instruments with maturities of less than one year.

Long-term interest rates

Interest rates on financial instruments with maturities greater than one year.

Domestic economic activity

The level of economic transactions and activities taking place within a country's borders.

Monetary authority

An entity, such as a central bank, responsible for regulating the money supply and interest rates to maintain economic stability.

Policy implications

The potential consequences or effects that monetary policy decisions have on the broader economy.

Debt markets

The market where debt instruments, such as bonds and loans, are traded.

Financial stability

The condition in which the financial system operates effectively, with no disruptions that could cause a crisis.

Persistent inflation

Inflation that remains high over a prolonged period, often necessitating tightening measures.

Consumer spending

The amount of money spent by households in the economy, a key driver of overall economic activity.

Interest rate differential

The difference between interest rates in two different markets, influencing capital flows.

Central bank independence

The degree to which a central bank operates without political interference, vital for effective monetary policy.

Liquidity trap

A situation in which interest rates are low and savings rates are high, rendering monetary policy ineffective.