NEW YORK (CNNfn) - The Federal Reserve, the U.S. central bank, affects the speed of the U.S. economy by altering the key federal funds interest rate, and also influences other rates around the world.|
Following are some key terms associated with the Fed and its policies:
Federal Open Market Committee: The FOMC meets eight times a year to set monetary policy by deciding where to set key interest rates that commercial banks and other lenders use as a gauge for their own rates.
The chairman of the FOMC, and of the Federal Reserve itself, is Alan Greenspan. The 12-member committee includes the seven members of the Fed's Board of Governors, the president of the Federal Reserve Bank of New York and four presidents from the 11 other regional Reserve Banks who serve one-year terms.
Fed funds rate: A target interest rate the Fed can adjust from time to time to influence the interest rate individual banks in the U.S. can charge each other to borrow money overnight. The rate currently stands at 5.5 percent.
Discount rate: The discount rate, which currently rests at 5 percent, is the true foundation for interest rate policy within the Fed. The discount rate is the rate of interest that the central bank would charge commercial banks to borrow money if they needed it. This option is rarely exercised, however, since most U.S. banks lend money to each other. This rate is used mainly as a barometer for where interest rates should be.
Balance of risks: In mid-January, the Fed announced changes to the language it uses to describe which way the Fed's policy arm might be leaning toward future rate changes.
At the end of each meeting, the Fed will release a statement detailing the FOMC's consensus about the "balance of risks" about heightened inflation pressures or economic weakness in the future. Previously the Fed had unveiled its so-called interest rate bias, which was meant to provide financial markets with a hint about which direction the Fed's governors were leaning in terms of monetary policy.