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FOMC Simulation (Grades 9-12)
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The Federal Open Market Committee (FOMC), made up of the seven members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, is the Fed's most powerful monetary policy-making group. Meeting eight times a year, the FOMC discusses current and near-term economic and financial conditions, prior to making a decision to raise, lower or keep short-term interest rates the same. In order to help students understand the FOMC's
decision-making process, have students participate in the following simulation: |
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Assign students the roles below: |
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Number of students
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Role
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1
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Federal Reserve Chairman (chairman of the FOMC): conducts meeting according to agenda below
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1
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President of the Federal Reserve Bank of New York (vice-chairman of the FOMC)
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10
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Economist advisers: each gives a part of the presentation described in the agenda below
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6
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Members of the Board of Governors
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Remaining
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4 Reserve Bank presidents (in classes where more than 4 students remain, students may have to share the roles of each of the 4 presidents)
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Research advisers and other participants should be given 1-2 weeks to prepare for their roles by undertaking research to find the current status and future projections for this abbreviated list of economic indicators:
Real Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Nonfarm Payroll Employment
Industrial Production/Capacity Utilization
Advance Report on Durable Goods Shipments, New Orders, and Unfilled Orders
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- Chairman calls the meeting to order.
- Economist advisers presentation, including:
- an analysis of current economic conditions,
- a discussion of prospects for economic, financial and international conditions for the near future,
- an identification and discussion of economic issues of special concern at the present time or in the near future, and
- a recommendation as to whether short-term interest rates should be raised, lowered or kept the same.
- Chairman offers recommendation regarding the direction for short-term interest rates.
- Each Governor and Bank President makes a recommendation regarding the direction for short-term interest rates.
- Each of the seven members of the Board of Governors and the five Bank presidents casts a vote regarding the direction for interest rates, with the decision going to the majority.
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After the simulation is completed, as part of the whole-class discussion, have students explain their answers to the following questions:
- What did you learn about the way the Federal Reserve develops monetary policy from this simulation?
- What evidence was presented here to suggest that short-term interest rates should be raised?
- What was the strongest evidence for raising interest rates?
- What evidence was presented here that short-term interest rates should be lowered?
- What was the strongest evidence for lowering interest rates?
- What arguments could you make for keeping short-term interest rates at their current level?
- How can you explain the fact that not all presidents have the right to vote?
- Do you think this is fair?
- How can you explain the fact that the press is not allowed into FOMC meetings?
- Is this a good or a bad idea?
- Do you think that FOMC meetings should be televised live?
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