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 and to provide you with stable prices and moderate interest rates over time.
The FOMC uses monetary policy to influence the availability of money and credit. It announces its decisions at a committee meeting eight times a year, explaining 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 the FOMC responsibility for setting monetary policy.
- The FOMC uses its tools to attain maximum employment and stable prices. It must manage unemployment and inflation to achieve that.
Who Is on the FOMC?
The FOMC is made up of 12 voting members. They 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.
Jerome H. Powell became the chairman of the FOMC and the Federal Reserve Board of Governors on Feb. 5, 2018, for a four-year term. He was appointed for a second term lasting through Jan. 31, 2028. He has been a Fed board member since May 25, 2012.
Powell was a former senior Treasury official under former President George H.W. Bush prior to joining the Fed. 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. Former San Francisco Fed President John Williams has held the title since June 2018.
Richard H. Clarida (term: Sept. 17, 2018, to Jan. 31, 2022) resigned his governor seat effective Jan. 14, 2022. Dr. Clarida was an economics professor at Columbia University and director at PIMCO. Dr. Clarida also served as the assistant secretary of the U.S. Department of the Treasury for Economic Policy from February 2002 until May 2003.
Randal Quarles (term: Oct. 13, 2017, to Jan. 31, 2032) resigned his seat at the end of December 2021. Quarles was the Vice-Chair for Supervision until Oct. 13, 2021. He was 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.
Quarles was managing director at Cynosure Group and The Carlyle Group prior to taking on these rules, as well as a Treasury official under former President George W. Bush.
Lael Brainard (term: June 16, 2014, to Jan. 31, 2026) was an Under Secretary of the Treasury Department, a senior member of the Brookings Institution, and Deputy National Economic Advisor to former President Bill Clinton. She was also a professor of economics at M.I.T.'s Sloan School of Management.
Michelle Bowman (term: Nov. 26, 2018, to Jan. 31, 2034) was the State of Kansas bank commissioner, an experience that Congress requires at least one board member to have. Prior to joining the banking industry, Bowman worked in senior positions in the Department of Homeland Security (DHS) and the Federal Emergency Management Agency (FEMA), and also led a London-based government and public affairs consultancy.
Christopher Waller (term: Dec. 18, 2020, to Jan. 31, 2030) was the director of research at the Federal Reserve Bank of St. Louis since June 2009 prior to his appointment on the Board. He was also an economics professor at the University of Notre Dame and the University of Kentucky.
Regional Bank Presidents
Three Federal Reserve bank presidents rotate onto the FOMC for 2022:
- James Bullard, St. Louis
- Esther L. George, Kansas City
- Loretta J. Mester, Cleveland
Five other Fed bank presidents are alternates in 2022:
- Naureen Hassan, First Vice President, New York
- Charles Evans, Chicago
- Patrick Harker, Philadelphia
- Neel Kashkari, Minneapolis
- Meredith Black, Interim President, Dallas
What Does the FOMC Do?
The FOMC works with the Federal Reserve Board of Governors to control the four tools of monetary policy: the reserve requirement, open market operations, the discount rate, and interest on excess reserves. The FOMC sets a target range for the fed funds rate at its meetings eight times a year. The Board sets the discount rate and reserve requirement.
The Fed's Target for Inflation Rate
The Fed's target inflation rate is 2% over time. On Aug. 27, 2022, the Fed announced that it would tolerate inflation above 2% if it had been running persistently below 2%.
In 2022, however, with the invasion of Ukraine by Russia (resulting in significant increases in the price of oil and gasoline) and the continued strong economic growth as a result of the post-pandemic economic boom, the Federal Reserve Bank began to raise interest rates to counter the inflation increase in the US. In their March 2022 statement they noted:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
The Fed's Target for Unemployment Rate
The FOMC no longer has a definitive target for the natural rate of unemployment. Unemployment was historically low without triggering inflation before the 2020 recession. Instead, the Fed instead reviews a broad range of information rather than relying on a single unemployment rate target.
How the Fed Implements Monetary Policy
The FOMC uses an expansionary monetary policy to reduce unemployment. It boosts economic growth by increasing the money supply and lowering rates to spur economic growth and reduce unemployment.
Prices rise if the economy grows too fast, causing inflation. The FOMC uses a contractionary monetary policy to fight inflation. It 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 use the fed funds loans to make sure they have enough to meet the Fed's reserve requirement. Banks must keep this reserve each night at their local Federal Reserve bank or in cash in their vaults.
Read more about the most recent Federal Open Market Committee (FOMC) meeting and changes to the fed funds rate here.
The Board of Governors reduced the reserve requirement to zero on March 15, 2020 in an effort to further support the economy during a time of crisis.
The FOMC sets a target for the fed funds rate, but 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. It buys securities from banks when it wants the rate to fall. This adds to their reserves, giving banks more fed funds than they want. Banks will lower the fed funds rate to lend out this extra reserve.
The Fed replaces the bank's reserves with securities when it wants rates to rise. This reduces the amount available to lend, forcing the banks to increase rates.
The FOMC greatly expanded its use of open market operations to fight the 2008 financial crisis. This process is 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 Me?
The FOMC affects you through control of the fed funds rate. Banks use this rate to guide all other interest rates. The fed funds rate controls the availability of money to invest in houses, businesses, and ultimately in your salary and investment returns as a result. 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.
What Is President Biden's Position on the Fed?
President Joe Biden campaigned on the promise to expand the Fed's purpose to include closing racial and economic gaps. He'd like Congress to amend the Federal Reserve Act to require that the Fed include these in its scope. Biden would like the Fed to require faster check clearing, to better help low-income families, and to achieve greater diversity in its hiring practices.