Federal Open Market Committee - FOMC

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What is the 'Federal Open Market Committee - FOMC'

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other Reserve Banks rotate their service of one-year terms.

BREAKING DOWN 'Federal Open Market Committee - FOMC'

The one-year rotating seats of the FOMC are always comprised of one Reserve Bank president from each of the following groups: Boston, Philadelphia and Richmond; Cleveland and Chicago; St. Louis, Atlanta and Dallas; and San Francisco, Kansas City and Minneapolis. This helps ensure that all geographic regions of the United States receive fair representation.

Through open market operations, adjusting the discount rate and setting bank reserve requirements, the Federal Reserve possesses the tools necessary to increase or decrease the money supply. The Fed's Board of Governors is in charge of setting the discount rate and reserve requirements, while the FOMC is specifically in charge of open market operations, which entails the buying and selling of government securities. For example, to tighten the money supply, decreasing the amount of money available in the banking system, the Fed sells government securities.

The interaction of all the Fed's policy tools determines the federal funds rate, or the rate at which depository institutions lend their balances at the Federal Reserve to each other on an overnight basis. The federal funds rate, in turn, influences other short-term and long-term interest rates, foreign exchange rates, the supply of credit and demand for investment, employment, and economic output.

FOMC Procedure

The FOMC has eight regularly scheduled meetings each year, although they can meet more times if necessary. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.

Securities bought by the FOMC are held in the Fed's System Open Market Account (SOMA), which consists of a domestic and foreign portfolio. The domestic portfolio consists of U.S. Treasuries and Federal Agency securities, while the foreign portfolio consists of investments denominated in euros and Japanese yen. The FOMC can hold these securities until maturity or sell them when they see fit, as granted by the Federal Reserve Act of 1913 and Monetary Control Act of 1980. A percentage of the Fed's SOMA holdings are held in each of the 12 regional Reserve Banks. However, the Federal Reserve Bank of New York executes all of the Fed's open market transactions.

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