4 Foreign Forex Terms (Helpfully Translated from “Fed-Speak” into English)
When Ben Bernanke, the current Chairman of the US Federal Reserve Bank, makes a statement on behalf of the Fed, it often seems as if he is speaking a foreign tongue. In fact, he learned this language at the knee of one of its creators, former Fed Chair Alan Greenspan. The cryptic prose employed by Greenspan throughout his extended reign over America`s central bank often perplexed the general public, and this style has been deftly mimicked by Mr. Bernanke during the initial phase of his period in office. As this style doesn`t seem to be going anywhere (and because Rosetta Stone hasn`t come out with a system to learn Fed-Speak yet), we must take the first steps towards understanding this idiom on our own. Here then are four commonly used and commonly misunderstood terms used by the Fed and their corresponding meanings, usefully translated into simple English.
1. “Unit Labor Costs”
Though this phrase might seem unfamiliar to most everyday investors, it is actually one of the more straightforward used by the Fed and is relatively uncopmlicated to parse. In simple terms, unit labor costs represent the labor costs required to produce a single output unit. This is by necessity a rather vague term, as neither the amount of output nor the type of good or service is specified. The term is not intended to be of much practical use, so anytime that the Fed employs it, you are better served to look at the conceptual argument that is being made. This phrase is most often employed when the Fed is addressing the issue of inflation, which is directly affected by labor costs.
2. “Aggregate Demand”
At its most basic level, monetary policy is essentially determined using an equation that contains only two variables: aggregate supply and aggregate demand. Again, this is a fairly conceptual term as it is unfeasible to quantify the aggregate demand of an entire economy. However, an examination of both sides of this equation in basic terms can provide insight into key economic indicators. Again, this term is often employed by the Fed when commenting on the rate of inflation. When aggregate demand increases relative to aggregate supply, prices inevitably rise. Therefore, escalation in aggregate demand can lead to accelerated inflation rates, while a decrease in aggregate demand can suppress inflation.
3. “Firming” or “Tightening”
Firming and tightening are simply affected terms employed by the Fed when they don`t want to use straightforward terminology to identify a hike in interest rates. When interest rates are high, both individual consumers and businesses are less apt to borrow money, which generally slows the economy. The opposite is true when rates are low. Therefore, the phrase “loose” money policy has come to be closely associated with low interest rate and a money policy described as “tight” is now basically synonymous with high interest rates.
4. “Resource Utilization”
Resource utilization is one of the most inherently esoteric phrase that you will ever hear employed by the Fed, but an examination of the terms reveals that the concept is actually rather simple and straightforward. The phrase refers to the literal utilization of capital and labor that are required to produce goods and services. The Fed prefers to see a bit of an excess in available inputs, meaning that the economy is not performing at full capacity. While this results in a certain amount of waste, it also alleviates pressure on prices. This is clearly at odds to how all but the most incompetent executives want to have their businesses run, which is as efficiently as possible. The Fed, however, tends to fret when factories are operating at or near full production and unemployment is low, maxing out resource utilization. When this occurs, the Fed frets, supply often becomes relatively low compared to demand, and skyrocketing prices ensue.
By-line:
Heather Johnson is a freelance finance and economics writer, as well as a regular contributor for CurrencyTrading.net, a site for currency trading and forex trading information. Heather welcomes comments and freelancing job inquiries at her email address heatherjohnson2323@gmail.com
