The instruments and frameworks central banks use — policy rates, IORB, QE/QT, forward guidance — and how reaction functions get inferred from minutes, dots, and press conferences.
The output gap is the percentage difference between an economy's actual output and its potential output — the level sustainable without generating inflationary pressure. A positive gap signals demand running hot; a negative gap signals slack. It is a central, if unobservable, input to monetary policy and Phillips-curve inflation forecasts.
A basis point (bp) is one-hundredth of a percentage point (0.01%); 25bp equals 0.25 percentage points, the conventional increment of a single central-bank rate move. Policymakers quote rate changes, yields, and spreads in basis points to avoid the ambiguity of percentage-of-a-percentage phrasing.
A bull steepener is a yield-curve move where short-dated yields fall faster than long-dated yields, steepening the curve as the front end "bulls" on rate-cut expectations. It is the classic signature of an easing cycle beginning, when markets price the central bank toward the exit.
Core PCE is the Personal Consumption Expenditures price index excluding food and energy, the Federal Reserve's preferred gauge of underlying US inflation. It strips volatile food and energy prices to reveal the persistent trend that informs the FOMC's 2% target, measured on the broad PCE basket rather than the narrower CPI.
Fiscal dominance is a regime in which government debt and deficits constrain monetary policy, forcing the central bank to keep rates lower, tolerate higher inflation, or monetize debt to preserve sovereign solvency — subordinating price stability to the fiscal authority's financing needs rather than the reverse.
r* is the real short-term interest rate consistent with output at potential and stable inflation — the rate at which monetary policy neither stimulates nor restrains the economy. It is unobservable, must be estimated, and anchors how restrictive any given policy stance actually is.