Extra Credit (Spring 2010)

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Frequently Asked Questions

Q: Why is core inflation a preferred inflation indicator for most economists?
A: Measures of core inflation attempt to strip out or smooth volatile changes in particular prices to distinguish the inflation signal from the transitory noise. Thus, relative to changes in headline inflation measures, changes in core measures are much less likely to be reversed, provide a clearer picture of the underlying inflation pressures, and so serve as a better guide to where headline inflation itself is heading. Of course, if a particular shock to noncore prices is not temporary but more persistent, then the higher costs are likely to put some upward pressure on core prices. Central bankers must always be aware of this risk. However, research has shown that, over the past 25 years or more, headline inflation in the United States has tended to revert more strongly toward core inflation than core inflation has moved toward headline inflation. As that record suggests, core measures often are much better than headline indexes at providing a first approximation of the permanent changes to inflation.

Source: Federal Reserve Governor Frederic S. Mishkin speech, October 20, 2007
Monetary Policy
Q: How many people (including economists, advisers, etc.) attend the Federal Open Market Committee (FOMC) meetings?
A: The Federal Open Market Committee (FOMC) consists of the members of the Board of Governors of the Federal Reserve System and five voting Reserve Bank presidents. The president of the New York Fed always has a vote, and four other voting Reserve Bank presidents rotate among the remaining Federal Reserve districts. However, all Federal Reserve Bank presidents are represented at the meeting and provide reports about the economic conditions in their districts. In addition to the FOMC members and the nonvoting presidents, policy advisers are also present at the meetings. While the number of participants at the FOMC meetings varies, typically 60–65 individuals are present. The FOMC meeting minutes, which are posted approximately two weeks following a meeting, provide the names of all individuals who were present.
Q: What are primary dealers? How are they involved in open market operations?
A: The Federal Reserve Bank of New York conducts open market operations for the Federal Reserve, under an authorization from the Federal Open Market Committee. The group that carries out the operations is commonly referred to as "the Open Market Trading Desk" or "the Desk." The Desk is permitted by the FOMC's authorization to conduct business with U.S. securities dealers and with foreign official and international institutions that maintain accounts at the Federal Reserve Bank of New York. The dealers with which the Desk transacts business are called primary dealers. The Federal Reserve requires primary dealers to meet the capital standards of their primary regulators and satisfy other criteria consistent with being a meaningful and creditworthy counterparty. All open market operations transacted with primary dealers are conducted through an auction process.

For more information on open market operations and primary dealers, see The Federal Reserve System: Purposes and Functions, page 38.