U.S. Monetary Policy: An Introduction. Part 4: How Does the Fed Decide the Appropriate Setting for the Policy Instrument?

1. Define the following terms used in the reading:
   1. policy instrument
   2. lags in policy

2. What are the basic steps in the Fed's policymaking process?

3. What problems associated with data, models, and policy goals complicate the Fed's policymaking process?

4. How did uncertainty regarding the growth rate of maximum sustainable output complicate Fed policymaking in the early 1970s and the late 1990s?

5. Suppose the Fed determines that the current economic situation calls for an easing of monetary policy. What else must it then decide? How will uncertainty on the part of policymakers influence these decisions?

Source: "U.S. Monetary Policy: An Introduction. Part 4: How Does the Fed Decide the Appropriate Setting for the Policy Instrument?" Federal Reserve Bank of San Francisco FRBSF Economic Letter, No. 2004-04, February 6, 2004.