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 meets several times a year to discuss whether to maintain or change the current policy. A vote to change the policy would result in either buying or selling US government securities in the open market to promote the growth of the economy.

BREAKING DOWN 'Federal Open Market Committee (FOMC)'

 

Members

The Federal Open Market Committee (FOMC) is composed of the board of governors, which has seven members, and five Federal Reserve Bank presidents. Members of the committee are usually categorized as hawks (who favor tighter monetary policies), doves (who are keener on stimulus), or somewhere in between.

By tradition, the chairman of the FOMC is also the Chair of the Board of Governors. As of July 2017, Janet Yellen serves as the Chair of the Federal Reserve Board. In addition to Yellen, there are three other members of the Board and three positions left unfilled. The other members of the Board are Stanley Fischer - hawk; Jerome Powell - moderate; and Lael Brainard - dove.

The vice-chairman of the FOMC is also the President of the Federal Reserve Bank of New York; a position currently filled by William Dudley. The President of the Federal Reserve Bank of New York serves continuously, while the presidents of the other Reserve Banks serve one-year terms on a three-year rotating schedule. For 2017, the serving presidents are Charles Evans - dove, Neel Kashkari - dove, Patrick Harker - hawk, and Robert Kaplan - centrist.

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, Dallas, and Atlanta; and
  • Kansas City, Minneapolis, San Francisco

This helps ensure that all geographic regions of the United States receive fair representation.

FOMC Procedure

The Federal Open Market Committee (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.

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.

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 in order to decrease the amount of money available in the banking system, the Fed sells government securities.

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.