Money & the Fed: The Ready Reckoner
The compact guide to Fed rates, reserves, QE and QT, inflation indexes, monetary aggregates and policy language. Short definitions and conditional policy signals, with sources.
A working sheet for readers who know the basics and want the terms back at their fingertips. 24 policy and inflation entries, plus five money measures; every definition is under 280 characters. Read a row, recall the relationship, move on. The last column adds the policy signal and its limits.
The three rates to keep separate: banks lend to one another → federal funds; a bank borrows from the Fed → primary credit; the Fed pays a bank on its reserve balance → IORB. “Federal funds” is a rate, not a reserve ratio. Overnight means until the next business day; the quoted rate is annualized.
How to read the arrows
↑ = rise; ↓ = fall. Hawkish leans toward restraint; dovish toward support. A policy-rate rise is tightening. A data release can instead create pressure for tighter policy. These are different statements.
For inflation, read the inflation rate and its persistence, not simply a higher CPI/PCE index level. Sustained above-target inflation usually adds hawkish pressure; cooling toward target creates room to ease. Jobs, expectations and supply shocks can change the response. These are conditional interpretations, consistent with the Fed’s strategy and balance of risks, not mechanical forecasts.
Rates and the central bank’s toolkit
| Term · linked source | Recall it in one breath | What a rise or fall usually means |
|---|---|---|
| Federal funds rate: target vs EFFR | The FOMC sets a target range for unsecured overnight lending between eligible institutions. The effective federal funds rate (EFFR) measures actual trades. This is a market rate, not the rate banks pay to borrow directly from the Fed. | Policy actionTarget ↑ → tightening; target ↓ → easing. That usually reads as hawkish/dovish, respectively. An EFFR wiggle within the range can be technical. |
| IORB — interest on reserve balances | The rate the Fed pays eligible banks on balances held at Federal Reserve Banks. It helps steer overnight market rates by giving banks an alternative to lending those funds elsewhere. | Policy rateIORB ↑ usually supports tighter overnight rates; ↓ supports easier rates. A small technical adjustment need not signal a change in the policy stance. |
| Discount window / primary credit rate | The main rate at which financially sound banks borrow directly from the Fed against collateral. It is a Fed-to-bank loan rate; the federal funds rate concerns lending in the market. Other discount-window programs have other rates. | Policy rate / usagePrimary credit rate ↑ → costlier Fed borrowing; ↓ → cheaper. More discount-window borrowing can signal funding stress, not a dovish Fed. |
| Repo / standing repo operations | A repo is cash borrowed against securities, structured as a sale and agreed repurchase. The Fed’s standing overnight repo operations supply secured funding to eligible counterparties and help limit upward pressure on overnight rates. | Rate vs quantityFed repo rate ↑ → costlier backstop funding; ↓ → cheaper. More repo lending adds temporary liquidity, but can be market plumbing rather than monetary easing. |
| ON RRP — overnight reverse repo | Eligible counterparties place cash with the Fed overnight against securities. Its offered rate helps put a floor under overnight rates. From the Fed’s side, repo supplies cash; reverse repo absorbs it temporarily. | Rate vs quantityOffered rate ↑ supports higher overnight rates; ↓ supports lower rates. ON RRP balances rising or falling have no reliable hawkish/dovish meaning by themselves. |
| SOFR — secured overnight financing rate | A broad measure of the cost of borrowing cash overnight against US Treasury securities. It is a market benchmark used in loans and derivatives. Unlike federal funds, this funding is secured by collateral. | Market signalSOFR ↑ → tighter overnight funding conditions; ↓ → easier. It can reflect policy rates or collateral/funding pressures; it is not itself a Fed decision. |
| OMO — open market operations | Central-bank purchases and sales of securities, outright or through repos, used to implement monetary policy. Some manage short-term rates and reserves; large-scale purchases can ease broader financial conditions. Not every purchase is QE. | Operation / purposePurchases or repos generally add reserves; sales or reverse repos absorb them. Hawkish/dovish depends on their purpose and the wider policy setting—not the direction alone. |
| QE / QT — quantitative easing / tightening | QE uses large-scale asset purchases to ease financial conditions, often lowering longer-term yields. QT shrinks holdings through runoff or sales. A runoff cap is a maximum, not a guaranteed reduction. Neither is identical to changing the policy rate. | Policy actionMore QE → easing. Faster QT → more balance-sheet tightening. Slower QT eases that pace, but need not signal rate cuts; reserve management is a separate consideration. |
| Reserve requirement / reserve ratio | The required fraction of specified bank deposit liabilities held as qualifying reserves. US reserve requirement ratios have been 0% since March 26, 2020. Banks still face capital, liquidity and other constraints; zero does not mean unlimited lending. | Policy requirementRequired ratio ↑ usually tightens bank funding constraints; ↓ loosens them. Interpretation is country-specific. At 0%, it is not an active US policy lever today. |
| Reserves, capital and liquidity | Reserves are bank cash and central-bank balances, depending on the measure. Capital absorbs losses; liquidity meets payments when due. A reserve ratio is not a capital ratio. Having valuable assets does not guarantee having cash at the needed moment. | No single directionReserves ↑ can ease settlement pressure; capital ↑ improves loss absorption. Neither alone identifies a hawkish/dovish shift. Liquidity provision can coexist with tight monetary policy. |
| Bank money creation | A bank loan normally creates a matching deposit. Repaying loan principal destroys that deposit money. Lending is constrained by capital, liquidity, risk, regulation and willing creditworthy borrowers—not mechanically by a fixed reserve multiplier. | Credit / demand signalCredit and deposits ↑ may strengthen demand; ↓ may weaken it. There is no automatic Fed response: loan quality, spending, inflation and the reason for the change matter. |
Inflation: measure, scope and time window
| Term · linked source | Recall it in one breath | What a rise or fall usually means |
|---|---|---|
| CPI — consumer price index | Tracks prices paid by urban US consumers for a representative basket. The CPI is an index level; CPI inflation is its percentage change over a stated period. It is widely used for cost-of-living adjustments and inflation-linked contracts. | Data → possible responsePersistent CPI inflation ↑ above the desired path → hawkish pressure; sustained cooling → more scope for easing. Watch the inflation rate, not simply an increase in the index level. |
| PCE — personal consumption expenditures price index | Tracks prices of US consumer goods and services, including purchases made on households’ behalf, such as employer-paid healthcare. Its scope and weights differ from CPI. The Fed’s 2% longer-run inflation goal refers to overall PCE inflation. | Data → possible responsePersistent PCE inflation above 2% or renewed acceleration → hawkish pressure. Sustainable progress toward 2% → more room for easing; below-target weakness can strengthen that case. |
| Headline vs core | Headline includes the full basket. Core CPI and core PCE exclude food and energy to help reveal underlying trends. Core is a diagnostic, not a claim those bills do not matter. The Fed’s 2% goal is for overall PCE, not core PCE. | Data → possible responsePersistent core acceleration generally adds hawkish pressure; cooling eases it. A headline energy spike alone need not trigger tightening; persistence and expectations matter. |
| Inflation / disinflation / deflation | Inflation: the general price level rises. Disinflation: it rises more slowly. Deflation: it falls. Moving from 6% to 2% inflation still makes the basket more expensive; it does not undo the earlier increase. | Data → possible responseAccelerating above-target inflation → hawkish pressure. Sustained disinflation → more scope for easing. Demand-driven deflation usually strengthens the easing case; supply-led price falls can differ. |
| MoM / YoY / annualized / base effects | MoM compares with last month; YoY with a year earlier. Annualized extrapolates a short period: 0.2% monthly is about 2.4% a year if repeated. Base effects come from the old comparison level. Check seasonal adjustment before comparing releases. | Measurement, then signalA stronger underlying inflation trend → hawkish pressure; a weaker trend → dovish pressure. One monthly surprise or a lower YoY reading caused by base effects is not enough. |
Policy stance and the economic cycle
| Term · linked source | Recall it in one breath | What a rise or fall usually means |
|---|---|---|
| Basis point — bp | One basis point is 0.01 percentage point. A 25 bp rise moves a rate from 4.00% to 4.25%. That is not a 25% increase; the relative increase is 6.25%. | Unit; no inherent directionFor the policy rate, +25 bp = tightening and −25 bp = easing. A basis point is only a unit; the instrument determines the meaning of “up” or “down.” |
| Nominal vs real interest rate | Nominal is the quoted rate. Real adjusts for inflation: approximately nominal minus inflation. Expected inflation matters for decisions made today; realized inflation measures the eventual purchasing-power result. | Stance, after inflationReal policy rate ↑ relative to neutral → more restrictive; ↓ → less restrictive. A nominal rate rise alone is ambiguous if expected inflation also rises. |
| Neutral rate — r-star / r* | The estimated real short-term rate consistent with full employment and stable inflation. It is unobservable and changes over time. Compare it with a real policy rate; add expected inflation when expressing neutral in nominal terms. | Benchmark; hold policy fixedr* ↑ makes an unchanged real policy rate less restrictive; r* ↓ makes it more restrictive. A revised estimate is not itself a hawkish/dovish policy action. |
| Hawkish / dovish | Hawkish leans toward tighter policy to restrain inflation; dovish toward easier policy to support activity and employment. These describe relative preferences or a shift in tone, not a promise to raise or cut at the next meeting. | Communication / preferenceMore hawkish → preference for tighter policy, including fewer or later cuts. More dovish → preference for easier policy. A hawkish cut or dovish hike can occur relative to expectations. |
| Tightening / easing; restrictive / accommodative | Tightening and easing describe a change in policy. Restrictive and accommodative describe its stance relative to neutral. A rate cut can leave policy restrictive; an unchanged nominal rate can become tighter if expected inflation falls. | Direction vs levelTightening → a move toward restraint; easing → a move toward support. A cut may still leave the real policy rate above neutral. Compare both the change and the resulting stance. |
| Soft landing / hard landing | A soft landing brings inflation down without a recession or major employment damage. A hard landing involves a sharp slowdown or recession. These are outcome descriptions, not precisely standardized statistical classifications. | Economic outcomeHard-landing risk ↑ usually adds pressure to ease, unless inflation prevents it. A soft landing can allow gradual normalization. Neither outcome guarantees a particular next rate move. |
| Yield curve / inversion | The yield curve compares yields across maturities for similar debt. An inversion puts shorter yields above longer ones, often signaling expected policy easing or weaker growth. It is a risk signal, not a guaranteed recession clock. | Market signal; no fixed arrowMore inversion can reflect tight short rates and expected future cuts. Steepening can reflect cuts at the short end or rising long yields. Read which end moved and why. |
| FOMC / dual mandate | The Federal Open Market Committee sets US monetary policy, including the federal funds target range. The Fed’s dual mandate is maximum employment and stable prices. Monetary policy works through financial conditions, spending and hiring, with lags. | Decision frameworkPersistent inflation risk ↑ leans hawkish; employment downside risk ↑ leans dovish. When both worsen, policy must balance them—there is no mechanical rule. |
Money measures: always name the country
Base money and bank-deposit money are different layers. The M-labels count selected money balances, not national wealth, stock-market value or all financial assets.
| Term · linked source | Recall it in one breath | What a rise or fall usually means |
|---|---|---|
| Base money / monetary base; “M0” varies | US monetary base = currency in circulation plus reserve balances at the Fed. It is central-bank money, distinct from bank deposits held by the public. “M0” is not a universally identical label: check the country and series definition. | Quantity; no fixed arrowBase ↑ can reflect QE, emergency liquidity, cash demand or reserve management; ↓ can reflect QT or other balance-sheet shifts. The cause, not the quantity alone, identifies the stance. |
| M1 — country-specific narrow money | US: currency outside banks plus demand deposits and other liquid deposits, including savings deposits since May 2020. India: currency with the public + demand deposits with banks + other deposits with the RBI. | Quantity; no fixed arrowM1 ↑ is not automatically dovish or inflationary. It may reflect deposit shifts, lending or a definition change. US M1’s 2020 jump is a warning against reading the label mechanically. |
| M2 — the next layer is not universal | US: M1 + small time deposits (under $100,000) + retail money-market fund balances, with retirement-account exclusions. India: M1 + savings deposits with post-office savings banks. The same label counts different instruments. | Quantity; no fixed arrowFaster M2 growth may support spending, but is not a Fed policy instruction or an inflation forecast. Slower growth need not mean tighter policy; check credit, money demand and output. |
| M3 — broad money, definition varies | India: M1 + time deposits with the banking system. The US stopped publishing M3 in March 2006; it is not a current official Fed aggregate. Other jurisdictions, including the euro area, define their own M3. | Country-specific quantityM3 growth ↑ can indicate broader monetary expansion; ↓ indicates slower growth, not necessarily contraction. It has no automatic policy signal, and there is no current official US M3 series. |
| M4 — name the jurisdiction | India: M3 + all deposits with post-office savings banks, excluding National Savings Certificates. UK M4 is a different broad sterling-money measure. There is no universal US-to-India-to-UK M1 → M4 ladder. | Country-specific quantityM4 growth ↑ or ↓ describes the chosen country’s broad money. It does not by itself tell you whether its central bank is hawkish/dovish—or what the Fed will do. |
Definition checks: Fed H.6, including the May 2020 M1 change; RBI monetary-aggregate definitions; Bank of England M4 scope. The Indian entries use the established M1–M4 series; the RBI also publishes newer aggregates with different definitions.
Six distinctions worth remembering
- Price level ≠ inflation rate. Slower inflation usually means prices are still rising.
- CPI ≠ PCE; core ≠ headline. Compare the same basket, measure and time window.
- Rate cut ≠ easy money. Policy can ease while remaining restrictive.
- Reserves ≠ capital ≠ household deposits. Payment capacity, loss absorption and spendable bank money are different things.
- QE ≠ a household cash transfer. It changes balance sheets and financial conditions; the seller and subsequent behavior matter.
- Money growth ≠ a fixed inflation formula. Credit, spending, output, supply constraints and demand for money affect the result.
These distinctions follow the Fed’s policy framework and the Bank of England’s explanation of money creation.
Want the mechanism to stick?
The cultural companion explains 20 foundational money ideas with worked examples, short practice and three story lenses. All are in English:
- American — global fiction and US cultural references
- Indian — Bollywood, cricket and public life
- Tamil — cinema, public life and festival culture
Use it for deeper understanding of inflation, central banks, bank money, interest rates, bonds and the wider financial system. The specialist policy terms on this sheet remain available here for quick recall.
Reviewed September 20, 2026. This is a definitions sheet, not a live rate board. For today’s settings, use the Fed’s policy tools and implementation releases; for market rates, use New York Fed reference rates.
Previous: Why these Money cheat sheets start with the human. Next: Explore the cultural guide.