The Times is running fortnightly briefings to coincide with Target Two Point Zero, the Bank of England competition for sixth-formers run in conjunction with the newspaper. The contest challenges students to play the role of the Bank’s Monetary Policy Committee (MPC) and recommend the best level for interest rates. This week: As President Bush nominates a new Chairman of the US central bank, the Federal Reserve, we look at its role.

What are the main differences between the Fed and the Bank of England?

The key difference between the two central banks is over their remits from government. While Britain’s MPC has just one goal, to meet the 2 per cent inflation target set by the Chancellor, the Fed’s broader brief, set in law by Congress, is to maintain stable prices while seeking to foster growth and maximise American employment. This is known as the Fed’s “dual mandate”.

How are Fed decisions taken?

The Fed’s key interest-rate setting body is the Federal Open Market Committee (FOMC) headed by Alan Greenspan, the present Fed Chairman, who has been in the post for 18 years and will step down at the end of January 2006. There are 11 other FOMC members, six of whom, including Mr Greenspan, are governors of the Fed’s board, appointed by the President.

While Britain’s MPC meets monthly, the FOMC meets eight times a year. It’s next rate-setting meeting is tomorrow. Decisions of both the MPC and FOMC are taken by majority vote. However, the process at the Fed is generally more consensual than at the Bank, with less emphasis on the individual responsibility of voting members.

Are there differences in the way in which decisions are announced?

Unlike the MPC, the FOMC’s decisions are always accompanied by a statement.

The wording of the statement is a key way in which the Fed shapes market views of the economy and of its likely next moves. For example, the Fed is committed to a “measured” pace of interest-rate increases, believing that rates are “accommodative” — meaning that they are relatively low and provide a boost to demand in the US economy.

Are decisions of the FOMC more transparent than the MPC’s?

The FOMC’s statement gives an immediate view of its thinking. Both groups publish minutes of meetings. However, the MPC’s minutes are released after two weeks, whereas the FOMC’s take a month.

Both Mr Greenspan and Mr King give regular testimony to their respective elected representatives — though the Fed Chairman is famed for making opaque comments that cloud his meaning.

What rates does the Fed set?

The Fed’s main instrument is the “Fed Funds” target rate.Changes to this rate for loans of overnight money to US institutions feed through to market interest rates in a similar way to that in which UK base rates affect Britain. The Fed also sets a largely symbolic Discount Rate.

How important are the Fed decisions for Britain?

Vital. The huge size of the US economy means that Fed decisions are one of the driving forces in the global economy. Fed decisions affect demand for Britain’s exports, not only in the United States, but worldwide. Fed decisions also have effects on exchange rates and prices for shares and bonds worldwide, with consequences for the British economy.

www.thetimes.co.uk/targettwopointzero

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