Campbell’s soup company combined the fun of eating dinner and learning your ABC’s when they introduced their now famous alphabet soup many decades ago. Today it seems all industries have combined the fun of alphabet soup with some terminologies specific to their businesses. Unfortunately for many of us, if we are not in a specific job or industry we generally do not know what each acronym stands for. Although soup is best when served hot, we promise this snack-sized portion will not burn your tongue.
FOMC is the abbreviation for the Federal Open Market Committee. It is the committee within the Federal Reserve that overseas “open market operations” in the U.S. Janet Yellen is the top dog of the Fed, and serves as the chairman. The committee also consists of eleven other voting members and a final member that rotates on an annual basis, in order to keep things fresh. One of the responsibilities at the Federal Reserve is to set the federal funds rate, otherwise known as the interest rate at which depository institutions (think banks etc.) lend money to each other overnight. This exchange of assets essentially influences the amount of money flowing through our economy on a daily basis, regulating this process is called monetary policy. After the 2008 financial crisis the public has learned/realized how important the FOMC continues to be to the economy and we all continue see this acronym more frequently.
To learn more about the Federal Reserve and their two cents about what money supply is, you can visit their website.
ECB is shorthand for the European Central Bank. This is the central bank to 19 of the 28 European Union members that have adopted the euro as their currency. The ECB implements monetary policy for the Eurozone and supervises the region’s banks. The stated mission of the ECB is to safeguard the value of the euro and maintain price stability. Mario Draghi, a name you may be familiar with these days, is the current President of the ECB. Although the United Kingdom is not a member of the Eurozone, their decision to leave the European Union might be considered the equivalent of a monkey wrench being thrown into the daily tasks of the ECB and EU. The UK is still considered a member of the EU and will be until they file their “divorce papers” (known at Article 50 of the Lisbon Treaty). These separation proceedings are expected to take a minimum of two years before the break up is official. How this unfolds in the future will be interesting and important for investors to keep tabs on. In addition, how it affects decisions made by the ECBs moving forward also warrants close attention.
CDS are not the small, shiny discs of music that replaced vinyl albums, and are now nearly obsolete. In this case, we are referring to the insurance-like contracts called Credit Default Swaps that promise to cover losses on certain fixed income securities in the event of a default. The mechanics behind these are that buyers of CDS make payments to the sellers of CDS in return for insurance against a default or “credit event” regarding the underlying investment. These products include sovereign, municipal, and corporate bonds, as well as mortgage-backed securities, etc. CDS are subject to “counterparty risk” – the insurer may not have the money to pay to the buyer in the event of a default. This exact scenario played a big role in the 2008 financial crisis. Many of us surely remember that companies like Bear Stearns and AIG were big players in the period leading up to the Great Recession. The movie “The Big Short” does an excellent job explaining this financial product as well as others. This movie reveals how if not regulated or utilized properly these financial products can cause significant problems. Although this movie focuses on unsavory financial personnel and transactions, the general public is introduced to some financial topics in a straightforward manner.
The financial industry provides us with more abbreviations than we could count. Therefore throughout our blogging journey will continue to pick a few to expand upon and serve up some delicious helpings of alphabet soup!