GMI

Financial Stability Mandate

The third mandate of major central banks (alongside price stability and employment). Post-GFC, central banks monitor systemic risk, supervise financial institutions, and use macroprudential tools to prevent financial crises

Interest Rate Corridor

The framework the Fed uses to control short-term rates: IORB sets the floor, ON RRP extends the floor to non-banks, and the discount rate sets the ceiling

Quantitative Easing (QE)

Large-scale Fed asset purchases (government bonds, MBS) that expand the balance sheet, increase reserves, and compress long-term yields. Used when short-term rates are already near zero

Quantitative Tightening (QT)

The reverse of QE — the Fed shrinks its balance sheet by letting assets mature or selling securities. Reduces reserves and pushes long-term yields higher

FOMC Minutes

Released ~3 weeks after each FOMC meeting. Summarise the full discussion and reveal the range of views within the committee — giving markets more detail than the post-meeting statement alone

Summary of Economic Projections (SEP)

Published 4 times per year. Contains FOMC members' forecasts for GDP, inflation, and unemployment, plus the dot plot showing each member's expected future interest rate path

Macroprudential Tools

Policy instruments used to reduce systemic risk in the financial system — e.g. capital buffer requirements, loan-to-value limits. Distinct from monetary policy tools

Discount Window

A standing Fed lending facility available to all banks, set above market rates. It acts as the ceiling of the interest rate corridor — banks can always borrow at this rate, capping how high overnight rates can go

Dot Plot

Part of the SEP. Each dot represents one FOMC member's projection for where interest rates should be at year-end. Markets use it to gauge the likely future path of rates

Jackson Hole

Annual economic symposium hosted by the Kansas City Fed. Fed Chair speeches here are closely watched as an informal communication channel for signalling future policy shifts

Phillips Curve

Downward-sloping curve showing the inverse relationship between unemployment (x-axis) and inflation (y-axis). As unemployment falls, inflation tends to rise, and vice versa

Phillips Curve Slope

Measures how sensitive inflation is to unemployment changes. A steep curve = small unemployment drop causes large inflation rise. A flat curve = unemployment has little effect on inflation (describes the modern era)

Anchored Inflation Expectations

When households and firms believe the central bank will keep inflation near its 2% target, regardless of short-term shocks. Anchored expectations shift the Phillips Curve down — unanchored expectations shift it up

Inflation Risk Premium

The extra compensation investors demand in nominal bonds for uncertainty about future inflation. Means breakeven inflation (nominal yield − TIPS yield) overstates pure inflation expectations

Breakeven Inflation

Nominal Treasury yield minus TIPS yield. Represents the inflation rate at which an investor is indifferent between a nominal bond and an inflation-protected bond. A market-based inflation expectations measure

University of Michigan Survey

A widely cited survey measuring US consumer inflation expectations over 1-year and 5-year horizons. A key survey-based inflation expectations measure

Survey of Professional Forecasters

A quarterly survey of professional economists' macroeconomic forecasts including inflation. More precise than consumer surveys but less frequent

Frictional Unemployment

Unemployment from workers transitioning between jobs. Always present even in healthy labour markets — creates a permanent baseline floor for the unemployment rate

Structural Unemployment

Unemployment from skill or geographic mismatches between workers and available jobs. Caused by technological change or industrial shifts; persists even when demand is strong

NAIRU

Non-Accelerating Inflation Rate of Unemployment. The specific unemployment rate below which inflation begins to accelerate. Defines the effective floor for unemployment

Inflation-Monetary Policy Feedback Loop

When unemployment falls below NAIRU → wages rise → inflation increases → central bank hikes rates → economy slows → unemployment rises back toward NAIRU. This loop is why unemployment has a floor

Economically Inactive vs Unemployed

Economically inactive people are not seeking work and are excluded from the unemployment rate entirely. They are not the same as unemployed — conflating the two is a conceptual error

Natural Rate of Unemployment

The long-run equilibrium unemployment rate consistent with stable inflation. Comprises frictional and structural unemployment. Synonymous with NAIRU in many models

Capital Stock

The total physical capital in an economy — machinery, equipment, infrastructure, buildings. Greater capital accumulation raises productive capacity and therefore potential output

Potential Output (Natural Level of Output)

The highest level of real GDP an economy can sustain without generating accelerating inflation. Determined by labour force, human capital, capital stock, technology, natural resources, and institutions

Business Cycle Trend

The long-run upward growth path of the economy around which the business cycle fluctuates. The cycle describes deviations above and below this trend, not just absolute growth

Trough vs Early Expansion

The trough is the bottom of the cycle — decline has stabilised but recovery has not yet begun. Falling unemployment and rising growth characterise early expansion, which comes after the trough

Cyclical Sectors

Industries most sensitive to the business cycle — e.g. industrials, consumer discretionary. Outperform during early expansion when recovering demand flows through most strongly

Duration (Bonds)

A measure of a bond's sensitivity to interest rate changes. Longer-maturity bonds have higher duration — their prices fall more when rates rise and rise more when rates fall

Bond Price/Yield Relationship

Bond prices and yields move in opposite directions. When rates rise, existing bonds fall in price (their fixed coupon is less attractive). When rates fall, existing bond prices rise

NBER Dating Committee

Identifies business cycle peaks and troughs ex-post (after the fact) — not useful for real-time investment decisions. Most economists got the 2023 cycle wrong. Forward-looking perspective is needed but difficult.

Natural Output

The highest sustainable level of real GDP an economy can produce without generating accelerating inflation. Determined by labour

Output Gap

The difference between actual output and potential output. Economic shocks cause deviations; monetary and fiscal policy acts as a counter-shock to close the gap.

Quantity Theory of Money (MV = PT)

Money supply × velocity = price level × transactions. Holding velocity constant: a fall in output raises prices; shifts in money supply shift aggregate demand.

Technical Recession

Two consecutive quarters of negative GDP growth. A commonly used but simplified definition; the NBER uses a broader set of indicators.

Conference Board LEI

Leading Economic Index — a composite of forward-looking indicators used to anticipate turning points in the business cycle. Not always accurate.

Nowcasting

A high-frequency real-time estimate of GDP using current data (e.g. jobs reports

Ray Dalio Credit Cycle

Dalio argues the business cycle is driven by credit: optimism leads to borrowing expansion which boosts spending; when debt must be repaid spending falls and the economy contracts.

Business Cycle Stage: Recovery

Rates low and staying low; cash flows rising; labour market weak but improving. Best asset: equities and risk assets.

Business Cycle Stage: Overheating

Rates rising to cool the economy; cash flows high but decelerating; low unemployment and wages rising. Best asset: short-duration bonds.

Business Cycle Stage: Stagflation

Rates high or stuck — the hardest stage; cash flows stagnating; high unemployment despite high inflation. Best asset: commodities and real assets.

Business Cycle Stage: Contraction

Rates falling to stimulate; cash flows declining but stabilising; rising unemployment and weak demand. Best asset: long-duration bonds.

Solow Model

Y = A·F(K

Total Factor Productivity (TFP)

A measure of how efficiently both capital and labour are used together in production. Captures the portion of output growth not explained by input growth alone.

Labour Productivity

Output produced per hour worked. Increased by better technology

GDP Growth ≠ Stock Returns (Ritter 2005)

Ritter (2005) found no positive relationship between a country's GDP growth rate and its stock market returns — high growth economies do not necessarily produce high equity returns for investors.

Fed Mandate: Dual Mandate

The Federal Reserve has a formal dual mandate: price stability (2% average inflation target) and maximum employment (highest sustainable employment without accelerating inflation).

Bank of England Mandate

Price stability as the primary objective plus support for the government's broader economic policy objectives including growth — giving it a wider remit than a pure inflation-targeting mandate.

ECB Mandate

Price stability is the primary objective. Employment and growth are secondary and pursued only insofar as they do not conflict with the inflation target.

Financial Stability as Third Mandate

Implicit third mandate for major central banks — not formally stated for the Fed but demonstrated in practice: e.g. the Fed introduced the BTFP in 2023 to stabilise banks despite ongoing QT.

FOMC Statement

Released on Day 2 of each FOMC meeting at 2pm EST. Announces the policy decision and provides economic assessment. Wording changes signal policy shifts — markets react instantly.

Fed Press Conference

Held immediately after the FOMC statement. The Chair explains the decision and manages market expectations more informally through tone and language.

FOMC Minutes

Released approximately 3 weeks after each meeting. Contains the full discussion and reveals the range of views within the committee — gives deeper insight than the statement alone.

SEP + Dot Plot

Summary of Economic Projections — released quarterly. Includes FOMC forecasts for GDP

Nick Timiraos / WSJ (Informal Fed Signal)

An informal Fed communication channel. During the media blackout period (Saturday before to Thursday after an FOMC meeting) the Fed occasionally signals views via Wall Street Journal reporter Nick Timiraos.

IORB (Interest on Reserve Balances)

The interest rate the Fed pays on reserves held by commercial banks. Because banks can earn this risk-free rate they will not lend below it — making it the floor for interbank interest rates.

ON RRP (Overnight Reverse Repurchase Agreement)

A facility where non-bank financial institutions (e.g. money market funds) deposit cash at the Fed overnight in exchange for securities earning the floor rate. Extends the rate floor beyond commercial banks.

Discount Window

A Fed lending facility where banks can borrow directly from the Fed at a rate above market rates. Acts as the ceiling for short-term interest rates — banks will never pay more than this rate.

Interest Rate Corridor

The framework used by the Fed to control short-term rates: IORB sets the floor; ON RRP extends the floor to non-banks; the discount window sets the ceiling.

Phillips Curve Equation

π = πe − β(u − u*) + v. Current inflation equals expected inflation minus the response coefficient times cyclical unemployment (actual minus natural rate) plus a supply shock term.

Phillips Curve Direction

When unemployment is below the natural rate (u < u*): labour market is tight

Phillips Curve Slope (β)

Measures inflation's sensitivity to unemployment. Steep β: small unemployment changes cause large inflation swings. Flat β: inflation responds weakly to unemployment — describes the post-GFC era of missing inflation.

PCE vs CPI

PCE: accounts for substitution behaviour

Fisher Equation

i = r + Eπ. The nominal interest rate equals the real interest rate plus expected inflation. Ex-ante uses expected inflation (used when setting rates); ex-post uses realised inflation.

Yield Curve

Plots bond maturity (x-axis) against yield (y-axis). Normal (upward sloping) = expansion; flat = uncertainty/transition; inverted = recession signal. Yields = expected future short-term rates + term premium.

Term Premium

The extra compensation investors demand for holding longer-maturity bonds rather than rolling over short-term bonds. Reflects duration risk and interest rate uncertainty.

US Rate Spillover: Exchange Rate Channel

When US rates rise the USD appreciates. This raises foreign output (exports become cheaper) and foreign inflation (imports more expensive in local currency).

US Rate Spillover: Demand Channel

When US rates rise US growth slows and imports fall. This reduces foreign output and foreign inflation through lower external demand.

US Rate Spillover: Financial Channel

When US rates rise capital flows to the US. This tightens financial conditions abroad reducing both foreign output and foreign inflation.

CIP (Covered Interest Rate Parity)

F = S × (1 + i_domestic)/(1 + i_foreign). The forward exchange rate equals the spot rate adjusted for the interest rate differential. Profits from rate differences disappear after hedging with a forward contract.

UIP (Uncovered Interest Rate Parity)

No hedge is used. If the higher-rate currency does not depreciate as expected an investor earns both the carry and FX gain. But if the currency depreciates more than expected losses are amplified on both dimensions.

Discretionary vs Systematic Investing

Discretionary: driven by human judgement and macro views; flexible but subject to emotional bias and career risk — outperforms in high volatility/structural dislocation. Systematic: uses predefined rules/algorithms; consistent but risks model failure and overfitting — outperforms in stable trending markets.

Policy Trilemma

A country can only achieve two of three simultaneously: fixed exchange rate

Harry Browne Permanent Portfolio

A simple all-weather portfolio: 25% stocks / 25% long-term government bonds / 25% short-term government bonds / 25% gold. Designed to perform across all economic environments.

Backward-Looking (Ex-Post) Information

Based on historical data — e.g. financial statements

Forward-Looking (Ex-Ante) Information

Based on expectations about the future — e.g. options prices

Implied Volatility

Derived by inverting the Black-Scholes model using the observed market price of an option. All inputs are observable except volatility — implied vol represents the market's expectation of future price variability.

Put-Call Ratio

The ratio of put options to call options traded. High ratio (more puts): bearish market sentiment. Low ratio (more calls): bullish market sentiment.

Term Structure of Derivatives

The relationship between derivative prices on the same underlying asset at different expiration dates. Creates a forward-looking curve reflecting market expectations across time horizons.

Volatility Smile

The pattern where implied volatility is higher for options far out-of-the-money in both directions. Reflects investors paying a premium to insure against tail events — the market assigns more probability to extreme outcomes than a normal distribution would suggest.

Confirmation Bias

Investors seek information that confirms existing beliefs and ignore contradictory evidence. In practice: holding losing positions too long and exiting winning ones too early.

Overconfidence Bias

Investors overestimate their own knowledge and ability and underestimate risk. Results in overtrading and worse risk-adjusted returns.

Herding Bias

Investors follow the crowd regardless of their own analysis. Examples: buying at the peak and selling at the trough; the GameStop squeeze. Institutional herding is reinforced by career risk.

Home Bias

Investors irrationally overweight domestic assets. Data: US investors hold 94% domestic equities; Japan 98%; UK 82% (French & Poterba 1991).

Availability Heuristic

Investors judge the probability of events by how easily examples come to mind. Results in overestimating crash probability; reinforced by media which provides 3x more negative than positive coverage.

Negativity Bias

Negative information has a disproportionately stronger psychological impact than equivalent positive information. A negative 10% return reduces sentiment 5x more than an equivalent positive gain increases it.

FOMO (Fear of Missing Out)

Investors irrationally buy into rising markets to avoid missing gains others are making. Drives bubble formation; quick reversal typically follows (Bonaparte & Fabozzi 2024).