Which committee sets short-term interest rates by controlling various financial tools?

The correct answer is the Federal Open Market Committee. This committee plays a crucial role in setting short-term interest rates, which it does by employing various financial tools, primarily through open market operations. Open market operations involve the buying and selling of government securities, which directly influence the amount of money circulating in the economy and ultimately affect the federal funds rate— the interest rate at which banks lend to one another overnight.

By adjusting this rate, the Federal Open Market Committee can influence overall economic activity, including inflation and employment levels. When the committee decides to lower rates, it encourages borrowing and spending, whereas raising rates tends to slow down economic activity to control inflation. The other options do not have the same standing when it comes to directly managing short-term interest rates:

The Federal Reserve Board, while important, is more of an overarching body that oversees the Federal Reserve System rather than specifically setting interest rates.

The Monetary Policy Committee is not a commonly recognized term within the context of the United States' monetary policy framework and is more relevant to other countries.

The Interest Rate Board does not exist as an official entity within the structure of the Federal Reserve or the broader context of U.S. monetary policy.