What is a meeting of the federal open market committee?
The Federal Open Market Committee (FOMC) is made up of 12 members who determine short-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
Each year, the FOMC has 12 members, including seven members of the Federal Reserve Board of Governors (FRS). The FOMC includes the Chairman of the Board, Jerome Powell; and five of the twelve Presidents of the Federal Reserve Bank who hold office for one year on a three-year rotating schedule, with the exception of the Chairman 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 who are not designated members in any given year continue to attend FOMC meetings.
Dynamics of FOMC meetings
During the meeting, members discuss the development of local and global financial markets, as well as economic and financial forecasts. All participants – the Board of Governors and the twelve presidents of the reserve banks – share their views on the economic position of the country and discuss which monetary policy would be most beneficial to the country. After lengthy deliberations by all participants, only designated FOMC members have the right to vote on a policy they deem 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 office at the Federal Reserve Bank of New York where government securities are bought and sold. The negotiating office receives instructions from the FOMC which indicate the rate at which the FOMC voted for federal funds to be negotiated. The trading desk then purchases or sells government securities on the open market. If members voted to maintain the current policy, no commercial action from the office would be required.
Consequences of FOMC Meetings
Because the Fed determines the interest rate at the FOMC meeting, the announcement following that meeting is very important. Speculation often occurs weeks in advance about what will happen with interest rates after the meeting.
The expected rate change (if any) is often integrated into the markets before the announcement, which can lead to drastic market action if the announcement was different from what was expected. Lower interest rates can stimulate the economy, but at the same time reduce the value of money.