The Federal Open Market Committee (FOMC) is the chief policy-making group within the Federal Reserve System. It makes the key decisions for monetary policy in the United States. Monetary policy has to do with interest rates, credit conditions, and growth in the money supply.
The FOMC consists of 12 members. All seven members of the board of governors of the Federal Reserve System serve on the FOMC. The president of the Federal Reserve Bank of New York is also a permanent member of the FOMC.
The presidents of the 11 other regional Federal Reserve Banks hold the remaining four seats on a rotating basis. The seven presidents of regional Federal Reserve Banks who do not hold a seat attend meetings of the FOMC as nonvoting members. The chair of the board of governors of the Federal Reserve System also serves as chair of the FOMC. The president of the Federal Reserve Bank of New York serves as vice-chair. The seven members of the board of governors wield a powerful sway over monetary policy. They hold the majority of the voting seats on the FOMC and are permanent members. FOMC decisions are made either by consensus or near consensus. The president of the Federal Reserve Bank of New York owes his precedence over the other presidents to the special role played by the Federal Reserve Bank of New York. The Trading Desk at this bank carries out the day-to-day operations required to implement the policies decided by the FOMC. The account manager for the FOMC is the chief supervisor of the New York bank’s Trading Desk. That person is in daily contact with members of FOMC subcommittees. Normally, the FOMC meets eight times per year to assess monetary policy and make adjustments. If developments in the economy warrant quicker action, the FOMC holds additional meetings either in person or by conference call. Immediately after a meeting, the FOMC announces its decisions to an eagerly awaiting Wall Street and financial media. Financial markets often react within minutes of an announcement from the FOMC. Financial markets may react right before a meeting as speculators try to make money by betting on what action the FOMC will take.
The wording of the formal instructions to the New York Trading Desk is decided at the FOMC meeting. Once the FOMC decides to change policy, the new policy is implemented immediately. The policies are implemented through the purchase and sale of U. S government securities. The Federal Reserve’s trading in U.S. government securities are called “open-market operations.” The New York Trading Desk decides the amount of securities to buy or sell to carry out the instructions handed down by the FOMC.
The main interest rate the FOMC aims to influence is the Federal Funds Rate, which is the rate of interest commercial banks charge each other for overnight loans. The FOMC decides on a target for the Federal Funds Rate and instructs the New York Trading Desk to conduct the open-market operations necessary to maintain the targeted rate. To ease monetary policy, the FOMC lowers the targeted rate, and to tighten monetary policy, the FOMC raises the targeted rate.
See also: Announcement Effect, Open Market Operations
References
Meade, Ellen E. “The FOMC: Preferences, Voting, and Consensus.” Review, Federal Reserve Bank of St. Louis, March 2005, pp. 93–101.
Thornton, Daniel L. “When Did the FOMC Begin Targeting the Federal Funds Rate? What the Verbatim Transcript Tells Us.” Working Papers, 2004-015, Federal Reserve Bank of St. Louis, 2005.