Download IEM Curriculum Guide - FedPolicy Market

The Iowa Electronic Markets
Predicting Federal Reserve Policy
Economics Curriculum Using the IEM
FedPolicy Market
September 2000
Learning Objectives
Predicting Federal Reserve Policy
Prior to this module, students should be able to:




Describe and explain the economic significance of inflation, unemployment, and real
GDP growth.
Analyze and explain the relationship among inflation, unemployment, and real GDP
using the aggregate demand/aggregate supply model.
Describe the goals and objectives of Federal Reserve policy and the Federal Reserve’s
policy instruments.
Use the aggregate demand/aggregate supply model to describe and explain how the
Federal Reserve uses its policy instruments (in particular, the Federal Funds rate) to
meet its policy goals and objectives.
Learning Objectives
At the end of this module, students should be able to:




Summarize current national and regional economic conditions based on analysis of
relevant macroeconomic data.
Analyze and describe current economic conditions using the aggregate
demand/aggregate supply model.
Explain the current policy goals and objectives of the Federal Reserve with respect to
inflation, the unemployment rate, and real GDP growth.
Use the aggregate demand/aggregate supply model to describe and predict Federal
Reserve policy based on current economic conditions and the Federal Reserve’s policy
goals and objectives.
Important Aspects of the Module



Students retrieve and analyze economic data to construct a summary of current
economic conditions in the economy.
Students link economic data and current events to economic theory.
Students combine data, theory, and analysis to construct policy predictions based on
current policy goals and objectives.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
2
Lecture Outline
Predicting Federal Reserve Policy
1. Introduction: The Relationship Between Economic Policy and the State of the Economy
Policy Goals
Recession and Inflation
Offsetting Shifts in Aggregate Demand
Offsetting (Negative) Shifts in Aggregate Supply
A Self-Regulating Macro-Economy? – Potential GDP and the Natural Rate
The “New Economy” and the Role of Economic Policy
2. Role of the Federal Reserve
Policy Goals and Objectives
Policy Instruments: The Fed Funds Rate
FOMC Meetings
Effects of Federal Reserve Policy
What can Fed Policy Accomplish?
3. Predicting Federal Reserve Policy
Summarizing Current Economic Conditions
Recent Federal Reserve Behavior
Predicting Federal Reserve Policy
Example: The November, 1999 FOMC Meeting and the IEM FedPolicy Market
4. Summary
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
3
Lecture Notes
Predicting Federal Reserve Policy
Note: The material in this section is adapted from material published on the Board of
Governors of the Federal Reserve Web site.
Board of Governors Home Page
http://www.bog.frb.fed.us/default.htm
Web links for additional related information are provided below:
The Structure of the Federal Reserve System
http://www.bog.frb.fed.us/pubs/frseries/frseri.htm
Purposes and Functions of the Federal Reserve
http://www.bog.frb.fed.us/pf/pf.htm
1. Introduction: The Relationship between Economic Policy and the State of the
Economy.
Goals of Monetary Policy
Monetary policy has two basic goals: to promote "maximum" output and employment
and to promote "stable" prices. These goals are prescribed in a 1977 amendment to
the Federal Reserve Act of 1913.
In the long run, the level of output and employment in the economy depends on
factors other than monetary policy. These include technology and people's
preferences for saving, risk, and work effort. So, "maximum" employment and output
means the levels consistent with these factors in the long run. But the economy goes
through business cycles in which output and employment are above or below their
long-run levels.
Even though monetary policy can't affect either output or employment in the long run,
it can affect them in the short run. For example, when demand contracts and there's a
recession, the Fed can stimulate the economy—temporarily—and help push it back
toward its long-run level of output by lowering interest rates. Therefore, in the short
run, the Fed and many other central banks are concerned with stabilizing the
economy—that is, smoothing out the peaks and valleys in output and employment
around their long-run growth paths.
Although monetary policy cannot expand the economy beyond its potential growth
path or reduce unemployment in the long run, it can stabilize prices in the long run.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
4
Price "stability" is basically low inflation—that is, inflation that's so low that people don't
worry about it when they make decisions about what to buy, whether to borrow or
invest, and so on.
In practice, the Fed, like most central banks, cares about both inflation and measures
of the short-run performance of the economy.
The Federal Reserve’s Concern with Inflation
The Federal Reserve is concerned about high inflation because it can hinder
economic growth. For example, when inflation is high, it also tends to vary a lot, and
that makes people uncertain about what inflation will be in the future. That uncertainty
can hinder economic growth in a couple of ways—it adds an inflation risk premium to
long-term interest rates, and it complicates the planning and contracting by
businesses and households that are so essential to capital formation.
High inflation also hinders economic growth in other ways. For example, because
many aspects of the tax system are not indexed to inflation, high inflation distorts
economic decisions by arbitrarily increasing or decreasing after-tax rates of return to
different kinds of economic activities. In addition, it leads people to spend time and
resources hedging against inflation instead of pursuing more productive activities.
Federal Reserve Policy: Offsetting Shocks to the Economy
Output, employment, and inflation are influenced not only by monetary policy, but also
by such factors as our government's taxing and spending policies, the availability and
price of key natural resources (such as oil), economic developments abroad, financial
conditions at home and abroad, and the introduction of new technologies. In order to
have the desired effect on the economy, the Fed must take into account the influences
of these other factors and either offset them or reinforce them as needed. This isn't
easy because sometimes these developments occur unexpectedly, and because the
size and timing of their effects are difficult to estimate.
The 1997-98 currency crisis in East Asia is a good example. Over this period,
economic activity in several countries in that region either slowed or declined, and this
reduced their demand for U.S. products. In addition, the foreign exchange value of
most of their currencies depreciated, and this made Asian–produced goods less
expensive for us to buy and U.S.–produced goods more expensive in Asian countries.
By themselves, these factors would reduce the demand for U.S. products and
therefore lower our output and employment. As a result, this was a factor that the Fed
had to consider in setting monetary policy.
Another example is the spread of new technologies that can enhance productivity.
When workers and capital are more productive, the economy can expand more rapidly
without creating inflationary pressures. During the past decade, there have been
indications that the U.S. economy may have experienced a productivity surge,
perhaps brought on by computers and other high-tech developments. The issue for
monetary policymakers is how much faster productivity is increasing and whether
those increases are temporary or permanent. The answer to that question may
determine to what extent the Federal Reserve should intervene in the economy.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
5
2. Role of the Federal Reserve
Monetary Policy Goals
The Federal Reserve’s monetary policy objective is to promote economic growth and
high employment by maintaining stability in prices, interest rates, financial markets,
and foreign-exchange rates.
Tools of monetary policy and Interest Rates
The Fed can't control inflation or influence output and employment directly; instead, it
affects them indirectly, mainly by raising or lowering short-term interest rates. The Fed
affects interest rates mainly through open market operations and the discount rate,
and both of these methods work through the market for bank reserves, known as the
federal funds market.
The Federal Funds Market and Monetary Policy
From day to day, the amount of reserves a bank has to hold may change as its
deposits and transactions change. When a bank needs additional reserves on a shortterm basis, it can borrow them from other banks that happen to have more reserves
than they need. These loans take place in a private financial market called the federal
funds market. The interest rate on the overnight borrowing of reserves is called the
federal funds rate or simply the "funds rate." It adjusts to balance the supply of and
demand for reserves. For example, an increase in the amount of reserves supplied to
the federal funds market causes the funds rate to fall, while a decrease in the supply
of reserves raises that rate.
The major tool the Fed uses to affect the supply of reserves in the banking system is
open market operations—that is, the Fed buys and sells government securities on the
open market. Suppose the Fed wants the funds rate to fall. To do this, it buys
government securities from a bank. The Fed then pays for the securities by increasing
that bank's reserves. As a result, the bank now has more reserves than it is required
to hold. The bank can then lend these excess reserves to another bank in the federal
funds market. Thus, the Fed's open market purchase increases the supply of reserves
to the banking system, and the federal funds rate falls. When the Fed wants the funds
rate to rise, it does the reverse; that is, it sells government securities. The Fed
receives payment in reserves from banks, which lowers the supply of reserves in the
banking system, and the funds rate rises.
The FOMC and Federal Reserve Policy
The Federal Open Market Committee (FOMC), consisting of seven members of the
Board of Governors of the Federal Reserve System, the president of the Federal
Reserve Bank of New York, and four additional Federal Reserve bank district
presidents, holds eight regularly scheduled meetings per year to direct the conduct of
open market operations in a manner designed to foster the long-run objectives of price
stability and sustainable economic growth.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
6
The Effects of Monetary Policy on the Economy
The point of implementing policy through raising or lowering interest rates is to affect
people's and firms' demand for goods and services. Changes in real interest rates
affect the public's demand for goods and services mainly by altering borrowing costs,
the availability of bank loans, the wealth of households, and foreign exchange rates.
For example, a decrease in real interest rates lowers the cost of borrowing and leads
to increases in business investment spending and household purchases of durable
goods, such as autos and new homes. In addition, lower real rates and a healthy
economy may increase banks' willingness to lend to businesses and households. This
may increase spending, especially by smaller borrowers who have few sources of
credit other than banks.
Lower real rates make common stocks and other such investments more attractive
than bonds and other debt instruments; as a result, common stock prices tend to rise.
Households with stocks in their portfolios find that the value of their holdings has gone
up, and this increase in wealth makes them willing to spend more. Higher stock prices
also make it more attractive for businesses to invest in plant and equipment by issuing
stock. In the short run, lower real interest rates in the U.S. also tend to reduce the
foreign exchange value of the dollar, which lowers the prices of the exports we sell
abroad and raises the prices we pay for foreign-produced goods. This leads to higher
aggregate spending on goods and services produced in the U.S. The increase in
aggregate demand for the economy's output through these various channels leads
firms to raise production and employment, which in turn increases business spending
on capital goods even further by making greater demands on existing factory capacity.
It also boosts consumption further because of the income gains that result from the
higher level of economic output.
3. Predicting Federal Reserve Policy
When predicting Federal Reserve policy, it is important to understand the Federal
Reserve’s policy objectives and the current state of the economy. For example, if
inflation is rising and economic statistics indicate persistent economic growth, the
Federal Reserve is likely to raise interest rates to slow spending in the economy and
reduce inflationary pressures.
When deciding on policy changes, the Fed looks at a variety of indicators of the future
course of output, employment, and inflation. Among the indicators are measures of the
money supply, real interest rates, the unemployment rate, nominal and real GDP
growth, commodity prices, exchange rates, various interest rate spreads (including the
term structure of interest rates), and inflation expectations surveys.
The Fed balances the current state of these economic indicators against its policy
goals and future expectations of economic activity derived from econometric models.
For example, during 1999 and into 2000 the Fed became increasingly concerned
about the possibility of future inflation arising from tight labor markets and rising
consumer and business spending, despite few signs of current inflation. While initially
the Fed, and in particular Alan Greenspan, supported keeping interest rates steady –
citing increasing labor producivity that helped to keep labor costs and inflation low –
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
7
the Fed eventually raised interest rates on multiple occasions in late 1999 and earlyto-mid 2000 to slow the economy.
Predicting future Federal Reserve monetary policy changes requires (1) an
understanding of the Federal Reserve’s policy objectives, and (2) a comprehensive
picture of the current economic conditions in the macroeconomy. As new information
is received on economic conditions in the economy, predictions of upcoming Federal
Reserve policy actions can change, especially during periods when the future course
of economic activity is uncertain. In these cases, each new piece of economic data
that is released may play a critical role in determining Federal Reserve policy actions.
Note: For an example of how contract prices in the Iowa Electronic Markets change
during such periods, please see the Powerpoint slides that accompany this curriculum
guide.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
8
Powerpoint Slides
Predicting Federal Reserve Policy
Provided separately.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
9
Federal Reserve Policy Assignment
Part 1: Summarizing Current Economic Conditions
DUE:
General Instructions for Completing this Assignment
Please follow the guidelines below as you work on this assignment.
1. This is a multi-part assignment. Each part of the assignment must be typed. Label clearly
each part of theassignment with a cover page giving your name and section number.
2. Complete each part in a separate section clearly labeling them Part 1, Part 2, etc.
3. Within each section, give the requested information, including sources of information
gathered.
4. Turn in your completed assignment to your instructor on the date it is due.
Goal: Part 1
In this assignment, you will learn to combine economic data with economic theory to
summarize and illustrate current economic conditions in the economy.
Summarizing Current Economic Conditions Based on Economic Data
The first step in this assignment is to collect data and information on various measures of
economic activity in the economy. Recent statistics on the unemployment rate, inflation rate,
interest rates, wages, consumer spending, and real GDP will give you some feel for how the
economy is currently performing. These statistics are often called “economic indicators”
because of their ability to “indicate” the overall health of the economy. In addition to the raw
data, it is useful to find out what other economic analysts (economists) are saying about the
performance of the economy. Much of this information is available on the Web. Some useful
starting points are provided below.
Use the data and information you collect to summarize the current state of the economy
in 1-2 typewritten pages. The summary should provide the reader with a general overview of
recent trends in the economy, as well as current economic conditions. Be sure to include a
summary of (1) real GDP, (2) the Consumer Price Index and inflation rate, and (3) the
unemployment rate, along with any other economic indicators that you believe help to illustrate
the current health of the economy.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
10
Note: This is precisely what the Federal Reserve does before each Federal Open Market
Committee meeting. It summarizes the economic conditions in each of the Federal Reserve
districts and publishes the summaries in a publication called the “Beige Book.” The Federal
Reserve’s most recent Beige Book is available online at
http://www.bog.frb.fed.us/FOMC/BeigeBook/2000/default.htm
As you collect data and read economic analyses, keep the following questions in mind:

What are the current rates of inflation and unemployment? Compared to the past year,
have they been increasing or decreasing?

Have overall economic conditions changed recently? In what way?
Some Starting Points For Finding Economic Information
ECONlinks: Economic Indicators
http://www.ncat.edu/~simkinss/econindicators.html
Provides links to current data on a variety of economic indicators.
The Dismal Scientist
http://www.dismal.com/isapi/dismalhome.dll
Current data and commentary on the economy.
Economic Analysis and Research from Bank of America
http://corp.bankofamerica.com/research/e_economic_analysis___research.html
Commentary and economic analysis on current economic trends in the U.S. economy.
Economic Information from First Union Bank
http://www.firstunion.com/library/econews/
Reports on current economic conditions.
ECONlinks Business News
http://www.ncat.edu/~simkinss/businessnews.html
Links to business information provided by major U.S. news providers
Dow Jones News Services
http://dowjones.wsj.com/n/economy.html
Up-to-date information on the economy.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
11
Relating Current Economic Conditions to Economic Theory using the AD/AS Model
Based on your results above, use the aggregate demand / aggregate supply model to illustrate
current economic conditions (and changes in those conditions). Be sure to indicate whether
you believe the economy is operating below the economy’s full employment level of real GDP
(potential GDP), at the economy’s full employment level of real GDP, or beyond the economy’s
full employment level of real GDP. Include evidence from the data and information you
gathered from the Web to support your claims. Be sure to include references to any data or
information that you use.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
12
Federal Reserve Policy Assignment
Part 2: Forecasting Federal Reserve Policy
DUE:
Goal: Part 2
In this part of the assignment you will produce a forecast of future Federal Reserve policy
based on current economic conditions, past Federal Reserve policy actions, and the Federal
Reserve’s current policy goals and objectives.
Before You Start:
Read the Appendix to this Assignment, “Introduction to the IEM and the FedPolicy Market,” to familiarize
yourself with the contracts that are offered in the IEM FedPolicy market. The prospectus for this market,
along with other information related to the FedPolicy market is available at
http://www.biz.uiowa.edu/iem/markets/fedpolicy.html.
Summarizing Recent Federal Reserve Policy
a. Visit the Board of Governors Web Site to obtain a copy of the minutes of the most recently
available FOMC meeting (http://www.bog.frb.fed.us/fomc/). What is the date of this
meeting? (Note: The Federal Reserve makes available the minutes of their FOMC
meetings with a one meeting lag.) Provide a brief (one page) summary of the Federal
Reserve’s view of economic conditions at the time of that FOMC meeting, the FOMC’s
policy action at that meeting, and their view of likely future Fed policy actions.
b. Visit the Board of Governors Web Site to obtain a copy of the “Press Release” from the
most recent FOMC meeting (http://www.bog.frb.fed.us/boarddocs/press/BoardActs/2000/).
Look for the most recent “FOMC Statement/Announcement” on this Web site. When did
the FOMC last meet? What policy actions did the FOMC take at this meeting and what
reasons did they provide to justify their position?
Forecasting Future FOMC Policy Actions
When is the next FOMC meeting? How have economic conditions changed since the two
most recent FOMC meetings and how are these changes likely to affect Federal Reserve
policy actions at the upcoming FOMC meeting? Describe briefly, based on current Federal
Reserve policy goals, recent Federal Reserve policy actions, and your summary of economic
conditions from Assignment 1. Use aggregate demand / supply analysis to illustrate recent
changes in economic conditions and use this as the basis for your prediction of future Federal
Reserve policy actions. What policy actions should the Federal Reserve take to meet its
current policy goals and objectives? In particular, should the Federal Reserve raise, lower, or
keep the federal funds rate the same at its next FOMC meeting? Explain.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
13
Given your analysis, what FedPolicy contract should you buy on the Iowa Electronic Markets?
Go to the FedPolicy market on the IEM. What are the current BID prices for the contracts
listed there? Are these prices consistent with your analysis? Explain. What new information
about the economy would cause you to change your forecast (and hence your
recommendation about which contract in the FedPolicy market to purchase)? Explain.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
14
Evaluation Questions
Predicting Federal Reserve Policy
Short Answer Sample Questions
1. The figure below provides hypothetical information from the FedPolicy market of the Iowa
Electronic Markets. Use this information to answer the questions below.
Trader: XXXXX
US$: X.XX
Contract
FRup1299
FRsame1299
FRdown1299
11/22/99 2:50:20 PM
BestBid
0.330
0.651
0.003
BestAsk
0.410
0.720
0.020
Iowa Electronic Markets
FedPolicy
LastPrice
0.402
0.720
0.003
a. How is the "winning" contract determined in this market on the day the market closes?
b. If you wanted to obtain a share of the Frup1299 contract immediately at the cheapest price,
how would you do it, given the information above? How much would you have to pay?
Explain.
2. Note: This problem would need to be updated to include the most recent FedPolicy market
information. The figures below are provided as an illustration.
The figure below provides information from the current FedPolicy market of the Iowa
Electronic Markets. Use this information to answer the questions below.
Trader: XXXXX
US$: X.XX
Contract
FRup1299
FRsame1299
FRdown1299
11/22/99 2:50:20 PM
BestBid
0.052
0.881
0.003
BestAsk
0.099
0.940
0.020
Iowa Electronic Markets
FedPolicy
LastPrice
0.052
0.940
0.003
The contract descriptions are provided below:
Name
FRup1299
FRsame1299
FRdown1299
Description
$1.00 if the fed-funds rate target rises on 12/21/99; $0 otherwise
$1.00 if the fed-funds rate target remains unchanged on 12/21/99; $0
otherwise
$1.00 if the fed-funds rate target falls on 12/21/99; $0 otherwise
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
15
a. According to this information, what are IEM market participants expecting the Federal
Reserve to do at its meeting in 12/99? Explain how you came to this conclusion. Why
do IEM market participants have these expectations? Provide at least two reasons.
b. What type of new information about the economy could cause these bid and ask prices
to change between now and the end of December (when these contracts liquidate)?
Give an example and explain what effect this information would have on the bid and
ask prices in this market and why.
Multiple-Choice Sample Questions
1. The decision-making arm of the Federal Reserve System is the
a. Congressional Budget Office.
b. Bureau of Economic Analysis.
c. Federal Open Market Committee.
d. Office of Management and Budget.
2. The actions of the Federal Reserve are often guided by the
a. economic conditions of the country.
b. Senate Banking Committee.
c. the Budget Director in the office of the Presidency.
d. the political party in power.
3. The Federal Reserve directly controls the
a. unemployment rate.
b. AAA Corporate bond rate.
c. Government Bond Rate.
d. Federal Funds Rate.
4. The Federal Reserve is responsible for the conduct of
a. fiscal policy.
b. monetary policy.
c. tax policy.
d. supply-side policy.
5. To increase spending in the economy, the Federal Open Market Committee is most likely
to
a. buy securities from the public through open market operations.
b. sell securities to the public through open market operations.
c. cut the tax rate.
d. increase the federal funds rate.
6. To slow down the economy, the Federal Open Market Committee is most likely to
a. buy securities from the public through open market operations.
b. sell securities to the public through open market operations.
c. cut the tax rate.
d. reduce the federal funds rate.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
16
7. If you expect the Federal Reserve to raise the interest rate, what type of contract would you
be most likely to buy from the IEM FedPolicy Market?
a. FRupMMYY
b. FRdownMMYY
c. FRsameMMYY
d. A market “bundle”
8. If you expect the Federal Reserve to reduce the interest rate, what type of contract would
you be most likely to buy from the IEM FedPolicy Market?
a. FRupMMYY
b. FRdownMMYY
c. FRsameMMYY
d. A market “bundle”
9. How many times does the Federal Open Market Committee meet each year?
a. once a year
b. twice a year
c. four times
d. about eight times
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
17
Appendix :
The Iowa Electronic Markets and the FedPolicy Market
Overview
The Iowa Electronic Markets (IEM for short) is a computerized market on which financial
contracts can be traded (bought or sold). This assignment refers to contracts traded in the
Federal Reserve Monetary Policy Market, or “FedPolicy” for short. The contracts are briefly
described in the next section and in more depth in the IEM Trader’s Manual. A detailed
description of the FedPolicy market is available in the Prospectus, available at the IEM
website:
http://www.biz.uiowa.edu/iem/markets/pr_FedPolicy.html
The assignment assumes that you have already obtained an IEM trading account and are
familiar with how to log in to the IEM.
Federal Reserve Monetary Policy Market Contracts
The contracts in the FedPolicy market are based on policy decisions made by the Federal
Reserve's Open Market Committee (FOMC) at their regular meeting. For each FOMC
meeting, a set of contracts will be posted and liquidate based on the policy actions taken at the
associated meeting. A schedule of planned FOMC meeting dates can be found at:
http://www.bog.frb.fed.us/fomc/
Contracts listed in this market will initially appear in sets of three, with each set referring to a
particular FOMC meeting. The three contracts will represent the three possible FOMC
decisions made at that meeting regarding the federal-funds rate target – to raise the target, to
lower it, or to leave it unchanged. The initial listing will be for the FOMC meeting scheduled for
month "MM" and year "YY" and will include the following three contracts:
Contract
Contract Description / Liquidation Value
FRupMMYY $1.00 if the fed-funds rate target rises; $0 otherwise
FrsameMMYY $1.00 if the fed-funds rate target remains unchanged; $0 otherwise
FrdownMMYY $1.00 if the fed-funds rate target falls; $0 otherwise
Similar contracts for each FOMC meeting will be introduced at the discretion of the IEM Board
of Governors. Note that, while these are the initial contracts, the IEM reserves the right to
spin-off (or split) contracts. See the prospectus for complete details.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
18
Contract Liquidation
Liquidation values will be set according to the contract descriptions. For example, if, at the
close of the regularly scheduled FOMC meeting in month/year MMYY, the FOMC announces
a decision to raise the target for the federal-funds rate, then each FRupMMYY contract held by
a trader will be redeemed for $1.00, while the FRsameMMYY and FRdownMMYY contracts
will expire with a $0.00 redemption value.1
The practice of the FOMC, initiated at the May 18, 1999 meeting, has been to release a public
announcement shortly after each regular meeting describing the funds rate target decision.
The announcements for 2000 are posted at:
http://www.bog.frb.fed.us/boarddocs/press/General/2000/
The usual title for the announcement is “FOMC Statement.” So long as the Federal Reserve
continues to publish its policy announcement publicly, this public announcement will be the
official source of FOMC policy decisions for purposes of determining liquidation values. If no
such statement is released by the FOMC, the Wall Street Journal will become the official
source. Specifically, the most definitive statement of FOMC actions appearing in the three
consecutive issues of the WSJ (Central Edition) after the close of the FOMC meeting will be
taken as the policy decision. If the decision of the FOMC remains unclear even after three
consecutive WSJ issues, the outcome "Fed-funds rate target remains unchanged" will be
declared the result for purposes of determining liquidation values.
The judgment of the IEM Board of Governors will be final in resolving questions regarding the
nature of the FOMC decision, including questions arising from typographical or clerical errors.
1
Note that liquidation values will depend solely on decisions made at the specific regularly scheduled FOMC meeting to change or
not change the federal-funds rate target from its level as of the start of that same meeting. Neither changes in the federal-funds rate
target made during the inter-meeting period nor decisions regarding other monetary policy issues or instruments will have any direct
bearing on those liquidation values.
FALL 2000 EDITION LAST EDITED ON 9/00
WWW.BIZ.UIOWA.EDU/IEM/ASSIGNMENTS
19