Central Banking Glossary | The Central Banker

The vocabulary, and where each word actually lives

A central bank rarely says interest rates went up and leaves it there. It says a target range moved, or that a rate it administers directly was reset, or that an operation was expanded, and each of those words points to a specific mechanism with its own document. The terms below carry that weight, so each one is given in the words a reader already has, with the label attached afterwards.

Where a term earns its keep

A word like corridor or forward guidance is only useful once you can point to what it does. The corridor system, for instance, is the arrangement of rates a central bank sets above and below its target, so that lending between banks stays inside a known band; the floor system does a related job with a single rate that sets the bottom. Knowing the shape of the thing is what lets a rate decision, once it's explained, actually make sense.

What each entry names

Every term is tied to the published record where it actually appears, whether that's a policy statement, an implementation note, or the minutes of a meeting, because the definition is only half the job. A reader who knows that forward guidance means a central bank's own statement about its future intentions can then go and find that statement.

Policy rate and target range: the rate a committee sets as its goal, and the band it steers the market rate into
Administered rates: the rates a central bank sets and pays directly
Open market operations, repo and reverse repo: the tools used day to day to keep the market rate inside its target
Corridor system and floor system: the two common structures for holding a rate in place
Forward guidance: a central bank's own published statement about what it expects to do next
Dual mandate: the two goals, usually stable prices and full employment, a central bank is set up to pursue

The mechanics behind several of these terms, including which rate does which job at the Federal Reserve, are set out at greater length in The Balance Sheet, Explained and in The Federal Reserve: Who Decides What, and the day a rate decision is actually made is walked through in What Happens on an FOMC Decision Day.

The vocabulary of central banking

Policy rate: The interest rate a central bank uses to steer borrowing and lending across the economy. For the Federal Reserve, this is not one single number: it is the federal funds target range, held in place by several administered rates working together. When a report says the Fed held rates steady, it usually means the target range was left unchanged at the most recent FOMC meeting.
Target range: The band the Federal Open Market Committee sets for the federal funds rate, given as an upper and lower limit. The FOMC implementation note, released the same day as the policy statement, states the new range and the date it takes effect. A move from 5.25%-5.50% to 5.00%-5.25% is a quarter-point cut to the range itself.
Administered rates: Rates a central bank sets directly. The Federal Reserve uses several together, including Interest on Reserve Balances (IORB) and the overnight reverse repo rate, to keep the federal funds rate inside its target range. A bank earning IORB on the funds it holds at the Fed has little reason to lend those same funds overnight for less, which is the effect the rate is meant to produce.
Open market operations: Purchases and sales of securities a central bank carries out to manage the level of reserves in the banking system and hold short-term rates near its target. These operations show up as changes in the securities a central bank holds from one weekly balance sheet report to the next. Large-scale securities purchases during a period of quantitative easing are open market operations run on a scale well beyond routine day-to-day adjustments.
Repo and reverse repo: A repo is a short-term loan in which one party sells a security and agrees to buy it back the next day at a slightly higher price, in effect borrowing cash overnight against that security. A reverse repo is the same transaction seen from the other side, where the lender of cash takes the security as collateral. A money market fund using the Federal Reserve's overnight reverse repo facility is lending cash to the Fed overnight and holding Treasury securities in return.
Corridor system: A way of controlling short-term rates by setting an upper and lower rate around the target, so the market rate is squeezed toward the middle. A central bank running this system lends at the top rate and pays interest at the bottom rate, discouraging the market rate from drifting past either edge. The European Central Bank's marginal lending rate and deposit rate mark the upper and lower edges of its corridor around its main policy rate.
Floor system: A way of controlling short-term rates by paying interest on reserves at a level close to the target itself, so that rate acts as a floor beneath which banks have little reason to lend. The Federal Reserve has run this way since its balance sheet grew large, using Interest on Reserve Balances (IORB) as that floor. With IORB paid on every dollar of reserves a bank holds at the Fed, that bank has no reason to lend the same funds overnight to another bank for less.
Forward guidance: A central bank's public statements about the likely path of its policy rate, used to shape expectations before any actual change is made. It appears in the FOMC's post-meeting statement and in the wording of its minutes, and it can move markets as much as the rate decision itself. A statement that the Committee does not expect a change to be appropriate until certain conditions are met is forward guidance.
Dual mandate: The two goals Congress has set for the Federal Reserve: maximum employment and stable prices. Every Summary of Economic Projections (SEP) and FOMC statement is framed against these two goals, and the Committee's account of its reasoning refers back to them directly. When the Committee explains a decision by weighing inflation against the labour market, it is applying the dual mandate to that specific choice.
Discount rate: The interest rate the Federal Reserve charges commercial banks that borrow directly from it through the discount window, used as a backstop. It sits above the target range and is published alongside the other administered rates in the FOMC implementation note. A bank facing a short-term shortfall it cannot cover in the overnight market can borrow at the discount rate instead, at a cost set above prevailing market rates.