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 the advisability of maintaining or modifying the current policy. A vote to change the policy would result in the purchase or sale of US government securities on the open market to promote the growth of the national economy.
Who are the members of the FOMC?
The FOMC is made up of the seven-member Board of Governors and five Presidents of the Federal Reserve Bank. Committee members are generally classified as hawks favoring tighter monetary policies, doves favoring recovery, or centrists / moderates somewhere in between.
Key points to remember
- The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy, in particular by directing open market operations.
- The FOMC is made up of the seven-member Board of Governors and five Presidents of the Federal Reserve Bank.
- The Committee regularly holds eight “secret” meetings each year which are the subject of much speculation on Wall Street.
President of the FOMC
Traditionally, the President of the FOMC is also the President of the Board of Governors. Designated by President Donald Trump, Jerome Powell was sworn in as President of the Federal Reserve Board on February 5, 2020. Powell is considered a moderate. Members other than the President are Randall Quarles, a centrist, and Lael Brainard, a dove. The remaining three positions are not filled.
Vice President of the FOMC
The Vice President of the FOMC is also President of the Federal Reserve Bank of New York; a position currently held by John C. Williams, who took office on June 18, 2020, as the 11th President and CEO of the 2nd District Federal Reserve Bank of New York. The President of the Federal Reserve Bank of New York exercises his functions on a continuous basis, while the presidents of the other reserve banks exercise a mandate of one year according to a rotating calendar of three years.
FOMC rotary seats
The one-year FOMC rotary seats are always composed of a chairman of the Reserve Bank from each of the following groups:
- Boston, Philadelphia and Richmond
- Cleveland and Chicago
- Saint Louis, Dallas and Atlanta
- Kansas City, Minneapolis and San Francisco
The geographic grouping system ensures that all regions of the United States receive fair representation.
The Federal Open Market Committee (FOMC) holds eight regular meetings each year, although they can meet more often if necessary. The meetings are secret and, therefore, the subject of much speculation on Wall Street, as analysts postulate on whether the Fed will tighten or loosen the money supply with a rise or fall in interest rates.
The interaction of all of the Fed’s policy tools determines the rate of federal funds or the rate at which deposit-taking institutions lend each other their balances to the Federal Reserve. The federal funds rate, in turn, influences other short and long term interest rates; foreign exchange rates; and credit supply and demand for investment, employment and economic production.
Role of the Federal Reserve against the FOMC
Through open market operations, adjustment of the discount rate and setting of bank reserve requirements, the Federal Reserve has the tools necessary to increase or decrease the money supply. The Fed’s Board of Governors is responsible for setting the discount rate and minimum reserves, while the FOMC is specifically in charge of open market operations, which involves the buying and selling of 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 purchased by the FOMC are deposited in the Fed’s Open Market Account (SOMA) system, which consists of a domestic and foreign portfolio. The domestic portfolio contains securities from the US Treasury and Federal Agency securities, while the foreign portfolio contains investments denominated in euros and Japanese yen.
The FOMC can hold these securities to maturity or sell them when they see fit, in accordance with the Federal Reserve Act of 1913 and the Monetary Control Act of 1980. A percentage of the Fed’s holdings in SOMA 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.
Example of the FOMC in the real world
On January 29, 2019, at its annual organizational meeting, the FOMC unanimously reaffirmed its “Statement of Long-Term Goals and Monetary Policy Strategy” with an updated reference to the median of the participants’ estimates. longer-term normal unemployment rate in the most recent “Summary of Economic Projections” (December 2020).
This statement is based on the FOMC’s commitment to fulfill a statutory mandate from Congress to promote maximum employment, stable prices and moderate long-term interest rates. Since monetary policy determines the long-term inflation rate, the FOMC can specify a longer-term inflation target. The FOMC reaffirms its judgment that inflation at the rate of 2%, measured by the annual change in the price index of personal consumption expenditure, is the most consistent with the statutory mandate of the Federal Reserve.