What Is a Federal Open Market Committee Meeting?
The Federal Open Market Committee (FOMC) consists of 12 members who determine near-term monetary policy. The Committee meets eight times a year, and any changes it decides on are announced immediately after the FOMC meeting.
Understanding the FOMC Meeting
There are 12 members of the FOMC in any given year, of which seven are members of the Board of Governors of the Federal Reserve System (FRS). The FOMC includes the Chair of the Board, Jerome Powell; and five of the twelve presidents of the Federal Reserve Bank who serve one-year terms on a three-year rotating schedule, except the president of the Federal Reserve Bank of New York whose term on the FOMC committee is permanent.
The remaining seven of the twelve Reserve Bank presidents that are not designated members in a given year still attend the FOMC meetings.
FOMC Meeting Dynamics
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.
The results of the vote are communicated to the manager of the System Open Market Account (SOMA), who is responsible for the staff of the trading desk at the Federal Reserve Bank of New York where government securities are bought and sold. The trading desk receives the directives from the FOMC that indicate the rate the FOMC has voted for federal funds to trade at. The trading desk then proceeds to buy or sell government securities on the open market. If the members voted to maintain the current policy, no trading action from the desk would be required.
After-Effects of FOMC Meetings
Because the Fed determines the interest rate at the FOMC meeting, the announcement following this meeting is very important. Speculation often occurs weeks in advance about what will happen with interest rates following the meeting.
The expected change in rate (if any), is often priced into the markets prior to the announcement, which can cause drastic market action should the announcement be different from what was expected. Interest rate cuts can stimulate the economy, but at the same time reduce the value of the currency.