Glossary: The Federal Reserve: Monetary Policy

The Fed is bound by the Full Employment and Balanced Growth Act (1978) to set the conditions for economic growth and employment as well as stable prices.

It does not have an official inflation target. Policy-makers are also debating what is the speed limit for the economy -- the rate of growth consistent with low and stable inflation.

It used to be seen as annual growth of 3%. Some central bankers consider this too low, owing to an improvement in productivity stemming from the IT revolution.

Policy is set by the Federal Open Market Committee (FOMC). The committee has 12 members, comprising the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York (William J McDonough), and, on a rotating basis, the presidents of four other Reserve Banks.

The FOMC meets eight times a year to decide interest-rate policy. Because of the importance of US rates to the global economy, the FOMC's meetings are watched closely by the world markets.

As well as changing rates, the FOMC may announce its bias for future policy decisions. It refers to a bias for tighter or looser policy as an "asymmetric policy directive".

The announcement does not have to follow the FOMC meeting. It is normally reserved for the publication of the minutes from the meeting, six weeks later. However, the FOMC can choose to publish its bias straight away when it considers the information important.

A bias does not guarantee a rate move will follow at the next meeting (or any subsequent one).

The FOMC sets rates through the purchase and sale of government securities in the open market. This influences the amount of bank credit and money in the economy. The FOMC also directs the Fed's activity in the foreign-exchange markets.

The FOMC's policies are implemented by the New York Federal Reserve bank.