FOMC: What It Is, Who Is On It, and What It Does
12 Strangers Who Change Your Life Eight Times a Year
The Federal Open Market Committee (FOMC) conducts monetary policy for the U.S. central bank. As an arm of the Federal Reserve System, its goal is to promote maximum employment, stable prices, and moderate interest rates over time.
What Is the Federal Open Market Committee (FOMC)?
The FOMC uses monetary policy to influence the availability of money and credit. The FOMC announces its decisions at its eight meetings per year. It explains its actions by commenting on how well the economy is performing, especially inflation and unemployment.
The Federal Reserve Act of 1913 gave the Federal Reserve and FOMC responsibility for setting monetary policy.
Who Is on the FOMC?
The Committee is made up of 12 voting members. These include the chair and six other governors appointed by Congress. It also includes the vice chair and four other regional Federal Reserve Bank presidents. The vice-chair position is permanent while the regional presidents serve one-year terms on the FOMC on a rotating basis.
President Trump appointed Jerome Powell to the Chair of the FOMC and the Federal Reserve Board of Governors on Feb. 5, 2018, for a four-year term. He has been a Fed board member since May 25, 2012. His board term lasts until Jan. 31, 2028.
Powell was a former senior Treasury official under President George H.W. Bush. He was a visiting scholar at the Bipartisan Policy Center and a partner at the Carlyle Group from 1997 to 2005. He replaced Janet Yellen as the Fed chair.
The vice-chairmanship always goes to the president of the Federal Reserve Bank of New York. Since June 2018, that is former San Francisco Fed President John Williams.
There are four Congressional appointees who currently sit on the FOMC. Two positions are vacant.
- Lael Brainard (June 16, 2014, to Jan. 31, 2026) is a former senior Treasury official and an economic adviser to President Clinton.
- Richard H. Clarida (Sept. 17, 2018, to Jan. 31, 2022) was an economics professor at Columbia University and director at PIMCO.
- Randy Quarles (Oct. 13, 2017, to Jan. 31, 2032) is the Vice Chair for Supervision until Oct. 13, 2021. He is also the chair of the Financial Stability Board. Both positions were created by the Dodd-Frank Wall Street Reform Act to strengthen financial stability after the 2008 financial crisis. He was managing director at Cynosure Group and the Carlyle Group. He was a Treasury official under President George W. Bush.
- Michelle Bowman (Nov. 26, 2018, to Jan. 31, 2034) was the State of Kansas bank commissioner. She also worked in senior positions in the Department of Homeland Security and the Federal Emergency Management Agency.
Regional Bank Presidents
The four Federal Reserve bank presidents who rotated onto the FOMC in 2020 are:
- Patrick Harker, Philadelphia
- Robert Kaplan, Dallas
- Neel Kashkari, Minneapolis
- Loretta Mester, Cleveland
Four other Fed bank presidents are alternates in 2020. They become FOMC members in 2021. They are:
- Mary C. Daly, San Francisco
- Thomas Barkin, Richmond
- Raphael Bostic, Atlanta
- Charles Evans, Chicago
The first vice president of the Bank of New York is a standing alternate. For 2020, it is Michael Strine.
What Does the FOMC Do?
The FOMC works with the Federal Reserve Board of Governors to control the three tools of monetary policy. The FOMC sets a target range for the fed funds rate at its meetings. The Board sets the discount rate and reserve requirement.
The FOMC uses its tools to attain maximum employment and stable prices. To achieve that, it must manage unemployment and inflation.
The FOMC no longer has a definitive target for the natural rate of unemployment. Before the COVID-19 pandemic, unemployment was historically low without triggering inflation. Instead, the Fed reviews a broad range of information instead of relying on a single unemployment rate target.
The Fed's target inflation rate is 2% over time. It wants prices to increase by 2% each year. When that happens, people expect inflation. It motivates them to buy now rather than later. A mild inflation rate spurs demand, and that's good for economic growth.
On Aug. 27, 2020, the Fed announced it would tolerate inflation above 2% if it had been running persistently below 2%.
To reduce unemployment, the FOMC uses expansionary monetary policy. That boosts economic growth by increasing the money supply. It lowers rates to spur economic growth and reduce unemployment.
If the economy grows too fast, then prices rise, causing inflation. To fight inflation, the FOMC uses contractionary monetary policy. That makes money more expensive, slowing the economy down. A slower economy means that businesses can't afford to raise prices without losing customers. They may even need to lower prices to gain customers. This combats inflation.
The Committee adjusts interest rates by setting a target for the fed funds rate. This is the rate that banks charge each other for overnight loans known as fed funds.
Banks must keep this reserve each night at their local Federal Reserve bank or in cash in their vaults. As of March 15, 2020, the reserve requirement is zero. That's to support the economy during the COVID-19 pandemic.
Although the FOMC sets a target for the fed funds rate, banks actually set the rate themselves. The Fed pressures banks to conform to its target with its open market operations. The Fed purchases securities, usually Treasury notes, from member banks. When the Fed wants the rate to fall, it buys securities from banks. In return, it adds to their reserves, giving the bank more fed funds than it wants. Banks will lower the fed funds rate to lend out this extra reserve.
Conversely, when the Fed wants rates to rise, it replaces the bank's reserves with securities. This reduces the amount available to lend, forcing the banks to increase rates.
To fight the 2008 financial crisis, the FOMC greatly expanded its use of open market operations. That's called quantitative easing (QE). The Fed purchased massive amounts of Treasury notes and mortgage-backed securities to achieve its goals. It reinstated QE in March 2020 to combat the recession caused by the COVID-19 pandemic.
How Does the FOMC Affect You?
The FOMC affects you through control of the fed funds rate. Banks use this rate to guide all other interest rates. As a result, the fed funds rate controls the availability of money to invest in houses, businesses, and ultimately in your salary and investment returns. This directly affects the value of your retirement portfolio, the cost of your next mortgage, the selling price of your home, and the potential for your next raise.
Pay close attention to the FOMC meeting announcements so you can anticipate economic changes and take steps to enhance your personal finances.
Board of Governors of the Federal Reserve System. "Statement on Longer-Run Goals and Monetary Policy Strategy." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "About the FOMC." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Jerome H. Powell, Chair." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "John C. Williams." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Lael Brainard." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Randal K. Quarles, Vice Chair for Supervision." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Michelle W. Bowman." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "What Is the Lowest Level of Unemployment that the U.S. Economy Can Sustain?" Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Federal Open Market Committee Announces Approval of Updates to its Statement on Longer-Run Goals and Monetary Policy Strategy." Accessed Sept. 17, 2020.
Federal Reserve Board. "Reserve Requirements," Accessed Sept. 17, 2020.
Federal Reserve Bank of St. Louis. "Quantitative Easing Explained." Accessed Sept. 16, 2020.
Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement: March 15, 2020." Accessed Sept. 17, 2020.