What is the Federal Open Market Committee (FOMC)?
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board (FRB) that determines the direction of monetary policy specifically by directing open market operations (OMO). The committee is made up of twelve members: the chairman, seven governors from the FRB appointed by Congress, and four regional fed presidents.
When it is reported in the news that the Fed has changed interest rates, it is the result of the FOMC's regular meetings.
- The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy specifically by directing open market operations.
- The FOMC is composed of the board of governors, which has seven members, and five Federal Reserve Bank presidents.
- The Committee has eight regularly scheduled "secret" meetings each year that are the subject of much speculation on Wall Street.
Understanding Federal Open Market Committee (FOMC)
The 12 members of the FOMC meet eight times a year to discuss whether here should be any changes to near-term monetary policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the growth of the national economy.
The FOMC consists of the board of governors, which has seven members, and five Federal Reserve Bank presidents. Members of the committee are typically categorized as hawks favoring tighter monetary policies, doves who favor stimulus, or centrists/moderates, somewhere in between.
By tradition, the chairman of the FOMC is also the Chair of the Board of Governors. The current Chair of the Federal Reserve Board is Jerome Powell who was sworn in on February 5, 2018. Powell is considered a moderate. Other members include Richard Clarida, Randall Quarles,Lael Brainard, and Michelle Bowman. The remaining two positions are vacant as of April 27, 2020.
The vice chairman of the FOMC is also the president of the Federal Reserve Bank of New York, a position currently filled by John C. Williams, who took office on June 18, 2018, as the 11th president and chief executive officer of the 2nd District Federal Reserve Bank of New York. 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.
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
- Kansas City, Minneapolis, and San Francisco
The geographic-group system helps ensure that all regions of the United States receive fair representation.
The Federal Open Market Committee (FOMC) has eight regularly scheduled meetings each year, but they can meet more often if the need should arise. The meetings are held in secret, and therefore, are the subject of much speculation on Wall Street, as analysts attempt to predict whether the Fed will tighten or loosen the money supply with a resulting rise or fall in interest rates. In recent years, FOMC meeting minutes have been made public following the meetings.
During the meeting, members discuss developments in the local and global financial markets, as well as economic and financial forecasts. All participants – Board of Governors and all twelve Reserve Bank presidents – share their views on the country’s economic stance and converse on the monetary policy that would be most beneficial for the country. After much deliberation by all participants, only designated FOMC members get to vote on a policy that they consider appropriate for the period.
Through open market operations (OMO), 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 buying and selling government securities. For example, to tighten the money supply and decrease the amount of money available in the banking system, the Fed would offer government securities for sale.
Securities bought by the FOMC are deposited in the Fed's System Open Market Account (SOMA), which consists of a domestic and a foreign portfolio. The domestic portfolio holds U.S. Treasuries and Federal Agency securities, while the foreign portfolio holds 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.
Simply put, the process begins with the results of the meeting being communicated to the SOMA manager who relays them to the trading desk at the Federal Reserve Bank of New York which then conducts transactions of government securities on the open market until the FOMC mandate is met.
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, and the supply of credit and demand for investment, employment, and economic output.
Real World Example of FOMC Policy
On January 29, 2019, at its annual organizational meeting, the FOMC unanimously reaffirmed its "Statement of Longer-Run Goals and Monetary Policy Strategy" with an updated reference to the median of participants' estimates of the longer-run normal rate of unemployment in the "Summary of Economic Projections" (December 2018).
This statement is based on the FOMC's commitment to fulfilling a statutory mandate from Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. Since monetary policy determines the inflation rate over the long term, the FOMC can specify a longer-run goal for inflation. The FOMC reaffirms its judgment that inflation at the rate of 2%, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s statutory mandate.