Federal Open Market Committee - Explained
What is the FOMC?
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Table of ContentsWhat is the Federal Open Market Committee (FOMC)?What does the FOMC Do?FOMC ChairmanFOMC Vice ChairmanFOMC Rotating SeatsFOMC OperationsRole of the Federal Reserve Versus the FOMCAcademic Research on the Federal Open Market Committee (FOMC)
What is the Federal Open Market Committee (FOMC)?
In the United States, the Federal Open Market Committee (FOMC) is an arm of the Federal Reserve Board that controls monetary policy. The Federal Reserve System is responsible for overseeing and regulating the open market operations in which monetary policy is key. Money policy or fiscal policy is a crucial policy that the governments of many countries pay attention to. In a bod to effectively manage monetary policy, governments empower a committee that is responsible for monetary policy and its effects in the country. In the U.S decisions as to whether a change of monetary policy is needed or not are made by the FOMC.
What does the FOMC Do?
The Federal Open Market Committee (FOMC) comprises of two categories of members; the board of governors and the Federal Reserve Bank presidents. A total number of 12 members make up FOMC, in which seven members are members of the board of governors and five Federal Reserve Bank presidents. The membership of FOMC is made up of experts, professionals, and practitioners who have knowledge about open market operations and are capable of making decisions that would promote economic growth. Through regular meetings, members of this committee reach decisions aimed at promoting economic growth and development. Here are the key points to know about the Federal Open Market Committee (FOMC);
- The Federal Open Market Committee (FOMC) is an arm of the Federal Reserve Board of the United States that makes decisions pertaining to monetary policy which in turn determine the outlook of the open market operations.
- Decisions are made by the FOMC at their meetings which they hold eight times in a year.
- The FOMC has 12 members who are appointed by the Federal Board Reserve.
- There are seven members of board of governors and five Federal Reserve Bank presidents in the FOMC.
The FOMC is usually appointed by the President of the United States with the approval of the Congress. The chairman of the FOMC is also the chair of the Board of Governors, this individual oversees the affairs of the Committee and vetos all decisions made. Jerome Powell is the current FOMC chairman, he was appointed by President Donald Trump and assumed office in February 2018.
FOMC Vice Chairman
Traditionally, the President of the Federal Reserve Bank of New York acts as the vice-chairman of the Federal Open Market Committee (FOMC). This position is currently being occupied by John C. Williams who is the 11th president of the Federal Reserve Bank of New York. John C. Williams resumed office in June 2018. The other four voting positions on the FOMC are occupied by the presidents of other Reserve Banks and these positions are rotating seats where the occupants only have one-year terms on a three-year rotating schedule.
FOMC Rotating Seats
The geographic-group system helps ensure that all regions of the United States receive fair representation. There are four groups that occupy the one-year rotating seats of the FOMC, this means that the Reserve Banks presidents that can occupy these seats can come from any of the groups. The groups are; Cleveland and Chicago; St. Louis, Dallas,and Atlanta; Boston, Philadelphia,and Richmond; and Kansas City, Minneapolis, andSan Francisco.
It is important that all the 12 members of the FOMC, both voting, and non-voting members are required to attend all the meetings of the FOMC. it is at the meetings are key decisions are made about monetary policy, interest rate, economic growth, among other related issues. The members of the FOMC, including the chairman, vice-chairman and other presidents of Reserve Banks are required to make contributions at meetings and participate in the assessment of the economy when needed. The FOMC has eight regularly scheduled meetings each year, but in cases where there is a need to schedule other meetings, the FOMC does so. The FOMC meetings are secret as this is where decisions, whether to change or maintain the current monetary policy or wther to tighten or loosen the money supply, are made.
Role of the Federal Reserve Versus the FOMC
Usually, the FOMC partners with the Federal Reserve to control the money supply through three monetary policy tools which are;
- The open market operations,
- The discount rate, and
- The Reserve rate.
Despite that the FOMC works with the Federal Reserve, there are certain roles that distinguish them. While the FOMC is in charge of the open market operations, the Federal Reserve sets the discount rate and reserve requirements through the Feds Board of Governors. The open market operations revolved around the trade of government securities, this is where government securities can be sold or purchased.
Academic Research on the Federal Open Market Committee (FOMC)