Federal Open Market Committee (FOMC)

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Definition of Federal Open Market Committee (FOMC):

The Federal Open Market Committee, or FOMC, sets monetary policy for the Federal Reserve. Its objectives are to stabilize prices and maximize employment. Seven members of the Board of Governors and five of the regional Federal Reserve Bank presidents serve on the FOMC. 

Detailed Explanation:

When you read or hear that the Federal Reserve has met and reached a decision it is usually referring to the Federal Open Market Committee. The FOMC meets every six weeks to set the nation’s monetary policy and create a plan for implementing it. One tool is open market transactions, where the Federal Reserve manipulates the federal funds rate to influence the economy. The federal funds rate is the rate on short-term loans made between banks. 

Changing the federal funds rate begins a sequence of events that ultimately affect the economy. For example, raising the federal funds rate has a direct impact on most other interest rates. Higher rates reduce the demand for loans. Fewer loans deter expansion. The Federal Reserve would increase the fed funds rate when it wants to slow the rate of growth. Conversely, the FOMC would choose to reduce the federal funds rate to implement expansionary monetary policy. Reducing the federal funds rate would lower most other interest rates, which in turn would increase lending activity and generate more economic activity.

The federal funds rate is determined by the law of supply and demand. Reducing the money supply increases the federal funds rate. The FOMC sells government securities when it wants to reduce the money supply. When selling a security, the money used to acquire the government security is taken out of circulation, so the money supply is reduced. (The money supply only includes money in circulation.) Conversely, the FOMC would purchase government securities when it wants to increase the money supply. The money used to acquire the government security would be placed into circulation, thereby increasing the money supply. Open market operations are by far the most common tool used by the Federal Reserve. It has the advantages of being able to quickly implement policy and to fine-tune the adjustments.

The FOMC is comprised of all seven members of the Board of Governors and five of the regional Federal Reserve Bank presidents. Four of the twelve reserve bank presidents serve on a rotating basis. The president of the New York Federal Reserve Bank is a permanent member because the New York bank has the primary responsibility of fulfilling the FOMC duties. Use the link below to access the minutes of recent FOMC meetings.
FOMC Minutes

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