Friday, December 07, 2007

What will the Fed do next week? Wanna Bet?

The Federal Reserve Open Market Committee (FOMC) will be meeting next week. The buzz on the street is that the Fed will cut the target Fed Funds rate for the third time this year. The size of the interest rate cut will be a tough decision for the FOMC.

The Wall Street Journal had a nice article this week on the Fed's policy meeting next week which is useful for understanding the challenges of stimulating the economy in the face of a credit crunch. Click here to view the full article on

The Iowa Electronic Markets sponsored by the School of Business at the University of Iowa lets you “bet” (buy futures contracts) on whether the Fed will raise or lower rates. The Federal Reserve Monetary Policy Market is “a real-money futures market. Contract payoffs are determined by monetary policy decisions of the Federal Open Market Committee regarding the federal funds target rate.” You will get a big payoff if you buy a contract with a bet that the Fed will keep rates the same or raise them. Check it out.

Edward Gamber of Lafayette College who helps to edit the Weekly Review on Macroeconomics for the Wall Street Journal has prepared some questions that might be useful in writing a Discussion Board Post about the Fed:
1.) What is the Fed expected to do to the target interest rate at its December meeting? Why?

2.) What is the Fed expected to do to its policy statement at its December meeting? Why?

3.) What is the difference between the federal funds rate and the discount rate? What would be the benefit of reducing the discount rate along with the federal funds rate?

4.) Why are banks reluctant to lend?

5.) What policy tools in addition to the federal funds rate could the Fed use to stimulate lending and economic activity?

Extra Credit: You can answer one and only one of the following questions for extra credit this week: Who is on the FOMC? Explain and cite your source. OR what would the payoff be if you were to buy a futures contract now from the Iowa Electronics Markets that bet that the Fed will hold rates the same at its January 2008 meeting. In other words how much would you gain if you bet $1.00 that the Fed-Funds Rate target set at the FOMC meeting scheduled for January 29/30, 2008 is the same as it was the day after the December 2007 FOMC meeting. Explain. If you are the first student to send me an e-mail ( with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions

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