1. Use any source available to research and write a short description of the activities of the Federal Open Market Committee.Who sits on the FOMC?

The Federal Open Market Committee (FOMC) is the group that makes monetary policy for the Federal Reserve System. By law, the FOMC must meet at least four times a year; in recent years, it has met eight times a year. The meetings, held in Washington, D.C., are attended by the members of the Fed's Board of Governors (BOG), the presidents of the 12 Federal Reserve Banks, and some senior Federal Reserve staff members. Most FOMC meetings are concluded in a single day.

There are 12 voting members of the FOMC: the seven members of the Board of Governors, the presidents of five of the 12 Federal Reserve Banks. The president of the Federal Reserve Bank of New York is a permanent voting member of the Committee, and the presidents of the other Reserve Banks serve one-year terms as voting members in a rotation that is set by law.

The FOMC formulates monetary policy by setting target federal funds rates--the interest rate that banks charge one another for short-term loans. If the FOMC wants to stimulate growth, they lower the federal funds rate target; if they want to combat inflation, they increase the rate by using monetary policy tools, chiefly open market operations.

2. Discuss the dilemma of the Fed as suggested by the article. Which issue do you see as more pressing on the U.S. economy?

As the article points out, currently the Fed faces the dilemma of inflation and slowing growth occurring at the same time, which makes monetary policy decisions more difficult. To meet their goal of maximum output and employment, the FOMC would need to lower interest rates to stimulate the economy. This decision, however, could add to inflationary pressures as the economy grows.

On the other hand, to meet their price stability goals during inflationary times, they would need to raise interest rates to slow inflation. The dilemma in this application of policy is that higher interest rates would slow the economy further.

Uncertainty also plays a role in every part of the monetary policymaking process. As yet, policymakers have no set of policies and procedures to effectively deal with all the situations that may arise. Instead, policymakers must decide how to proceed on a case-by-case basis.

Multiple Choice/True False Questions