The FOMC, or Federal Open Market Committee, is a committee within the Federal Reserve System that makes key decisions about interest rates and the growth of the U.S. money supply.
The Federal Reserve System controls the three tools of monetary policy
The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee (FOMC) is responsible for open market operations.
Open market operations refer to when the Federal Reserve buys and sells securities on the open market in order to raise or lower interest rates by regulating the supply of money.
Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.
The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
The Federal Open Market Committee (FOMC) consists of twelve members:
- The seven members of the Board of Governors of the Federal Reserve System.
- The president of the Federal Reserve Bank of New York.
- Four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
The rotating seats are filled from the following four groups of Banks.
One Bank president from each group:
- Boston, Philadelphia, and Richmond
- Cleveland and Chicago
- Atlanta, St. Louis, and Dallas
- Minneapolis, Kansas City, and San Francisco
Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.
The FOMC holds eight regularly scheduled meetings per year.
At these meetings, the Committee reviews economic and financial conditions to determine the appropriate stance of monetary policy and assess the risks to its long-run goals of price stability and sustainable economic growth.
The FOMC was formed in 1913 when the Federal Reserve Act of 1913 gave the Fed the responsibility for the U.S. monetary policy in response to the massive financial panic and bank runs especially during 1907.
The committee evaluates the nation’s economic and financial conditions and determines the fitting monetary policy, as mentioned, through open market operations.
One of the Fed’s main goals is to control the country’s inflation by setting inflation targets.
The committee aims to meet this target by establishing a target for the Federal funds rate (the cost that banks charge each other on overnight borrowings) as well.
The selling of government securities to banks lessens the amount of funds that they would be able to lend, effectively increasing the interest rate.
On the flip side, buying government securities from the banks increases their available funds, thus, decreasing the interest rate.