What is the FOMC (Federal Open Market Committee)?

Description of the FOMC

What is the Federal Open Market Committee (FOMC)?

The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve responsible for the most important issues of monetary policy in the United States.

The FOMC is responsible for the country’s open market operations (ie, the buy and sale of US Treasury Securities by the FED). It is the Federal Reserve Committee that makes decisions about the interest rates and monetary resources of the United States. The FOMC establishes monetary policy by specifying the short-term objectives for open market operations of the FED, which is itself the target level for the federal funds rate (Federal Funds Rate is the interbank interest rate, which commercial banks charge each other for loans).

The FOMC also directs the operations carried out by the Federal Reserve System in the foreign exchange market (Forex), although any intervention in the foreign exchange market is coordinated with the US Treasury, which has the responsibility of formulating the policies of the United States with respect to the exchange rate of the US dollar.

Members of the FOMC

The Federal Open Market Committee was formed by the Banking Act of 1933, and did not include the right to vote of the Board of Governors of the FED. The Banking Law of 1935 revised the protocols to include the Board of Governors and give form to the FOMC similar to how it is composed today. There was another modification in 1942 to create the current structure of twelve voting members: the seven members of the Board of Governors of the Federal Reserve and five of the twelve presidents of the Federal Reserve Banks. The president of the Federal Reserve Bank of New York is always a member of the FOMC, and the other presidents occupy the position on an annual and rotating basis and one is chosen for each group of banks: Boston, Philadelphia and Richmond, Cleveland and Chicago, Atlanta, St. Louis and Dallas and Minneapolis, Kansas City and San Francisco.

All the presidents of Federal Reserve Banks, including those who are not voting members of the FOMC, attend the meetings, participate in the debates and contribute to the FOMC’s evaluation of the economy and policy to be carried out. The FOMC meets eight times a year, approximately once every six weeks.

The current president is Jerome Powell.

Meetings and Decisions of the FOMC

The FOMC must meet at least four times a year in Washington DC. Since 1981, they hold eight regular meetings every year, at intervals of five to eight weeks. If circumstances require, members may be called to participate in a special meeting or conference call, or to vote on a proposed action. At each regular meeting, the FOMC votes on the policy that will be carried out during the interval between meetings.

Attendance at FOMC meetings is restricted due to the confidential nature of the analyzed information and is limited to FOMC members, presidents of Federal Reserve Banks, staff officers, Open Market System Account Manager, and a small number of the Board of Governors and necessary staff of the Federal Reserve Bank.

Decision making by the FOMC

Before each regular FOMC meeting, the FED staff prepares reports on past economic and financial developments and future forecasts. These reports are sent to the members of the FOMC and to the rest of the presidents of the Federal Reserve Banks. Reports prepared by the Manager of the Open Market System Account are also sent to the participants in the meeting, which include the operations carried out in the national market and in the foreign currency market since the last ordinary meeting.

At the same meeting, staff officers present oral reports on the current and future business situation, the conditions of the financial markets and international economic developments. In its deliberations, the FOMC considers such factors as the evolution of prices and wages, employment, production, income and consumption expenditure, residential and commercial construction, investment and business inventories, the situation of the foreign exchange market, interest rates, money and credit aggregates and the current fiscal policy.

Generally, each participant in the meeting expresses their own views on the state of the economy and prospects for the future and on what the proper direction of monetary policy would be. Then each one makes a more explicit recommendation about this policy for the period up to the next meeting and for the longer term if they consider it appropriate.

Finally, the Committee must reach a consensus on the decisions taken in monetary policy and these decisions are incorporated into a directive of the Federal Reserve Bank of New York, which is the Bank that executes the transactions of the Open Market system. The directive provides guidance to the Director of the bank in the execution of day-to-day operations in the open market. The Directive establishes the objectives of the Committee for the long-term growth of monetary and credit aggregates.

Monetary policy based on objectives on interest rates: Alternatives and Criticisms

The FOMC policy is based on inter-bank interest rate targets. This practice has been criticized by some analysts who maintain that there is a risk of an inflationary trend. Some economists argue that alternatives such as the traditional formula of targets for stable growth of the properly chosen monetary aggregate and the inflation targets would be much better, as many Central Banks have adopted. Given the strong inflationary pressure suffered by the United States in 1979, the FED abandoned the inflation objectives and instead began to base its policies on targeting non-borrowed reserves. However, after a certain period the FED came to the conclusion that this approach led to greater volatility in interest rates and monetary growth, and in 1982 it returned to the previous practice and is still valid today.

Ben Bernanke, a famous president of the Board of Governors of the FED, in a speech given in 2003 spoke about the monetary policy approach to inflation targets. He said that even a Central Bank like the FED, which does not orient its monetary policy around an explicit and public objective of inflation, always tries to maintain low and stable inflation in the formulation of its interest rate targets. As a president of the FED, Bernanke promoted greater transparency in the communications of the FED.


 

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