What Is the Federal Open Market Committee?
12 Strangers Who Change Your Life 8 Times a Year
The Federal Open Market Committee is the monetary policy arm of the Federal Reserve System, the central bank of the United States. It works with the Federal Reserve Board of Governors to control the three tools of monetary policy. The FOMC controls open market operations. The Board sets the discount rate and reserve requirement.
The FOMC uses its tools to attain the ideal economic growth rate of between 2 and 3 percent.
To achieve that, it must fight unemployment and inflation. The natural rate of unemployment is between 4.7 percent to 5.8 percent. Below that, companies can't find enough workers to remain productive. The target inflation rate is 2 percent. That means the FOMC wants prices to increase around 2 percent each year. This sets up expectations of inflation, and it motivates consumers to buy now rather than later. A mild inflation rate spurs demand, and that's good for economic growth.
To lower 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, it 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, and may even lower prices to gain customers.
This combats inflation.
What the FOMC Does
The Committee adjust 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 these 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.
The Committee 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. Find out what was done at the latest FOMC meeting.
Although the FOMC sets a target for the fed funds rate, banks actually set the rate itself. 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 want 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 2008 financial crisis, the FOMC greatly expanded its use of open market operations. That's called quantitative easing. The Fed purchased massive amounts of Treasury notes and mortgage-backed securities to achieve its goals.
The FOMC has twelve voting members. Its Chairman is the Chair of the Federal Reserve Board.
Until February 3 2018, the Chair is Janet Yellen. Analysts say she is "dovish." That means she is more concerned about unemployment than inflation. She tends to favor a lower fed funds rate and other expansionary monetary strategies.
The Vice-Chairmanship always goes to the president of the Federal Reserve Bank of New York. In 2017, that was William Dudley, a Yellen ally. He will leave the position in 2018, six months early. The First Vice President, Michael Strine, is his alternate.
Seven of the twelve positions are filled by the Federal Reserve's Board of Governors. Since the recession, Congress has only filled five of the Board's seven positions. The Senate Banking Committee didn't want to approve President Obama's nominations until after the 2016 Presidential election.
Here are the other three Board members.
- Jerome Powell, former senior Treasury official under President George H.W. Bush. He is dovish. President Trump nominated him to replace Janet Yellen as the Fed Chair when her term expires. The Senate approved the nomination on January 23, 2018.
- Lael Brainard, former senior Treasury official and an economic adviser to President Clinton. She is dovish.
- Randy Quarles, former managing director at Cynosure Group and the Carlyle Group, and a Treasury official under President George W. Bush. Neither dovish nor hawkish, he favors using strict guidelines that determine when the Fed changes rates. He was Trump's first appointee. He is also the Vice Chairman for Supervision until October 13, 2021. That position was created by the Dodd-Frank Wall Street Reform Act.
The other four FOMC members are Federal Reserve Bank presidents. They each serve one-year terms on a rotating basis.
The four Federal Reserve bank presidents who rotate onto the FOMC in 2018 are as follows.
- Loretta Mester, Cleveland. Hawkish. She favors contractionary policy, would prefer to raise rates, and is more worried about inflation than unemployment.
- John Williams, San Francisco. Dovish.
- Tom Barkin, First Vice President, Richmond. Moderate.
- Raphael Bostic, Atlanta. Former Obama administration housing official. Moderate.
These four bank presidents will be alternates in 2018 and FOMC members in 2019. They are as follows.
- James Bullard, St. Louis. Hawkish.
- Esther George, Kansas City. Hawkish.
- Charles Evans, Chicago. Very dovish.
- Eric Rosengren, Boston. Dovish.
The four remaining president will be alternates in 2019 and FOMC members in 2020. They are.
- Charles Evans, Chicago. Very dovish.
- Patrick Harker, Philadelphia. Moderate.
- Robert Kaplan, Dallas. Dovish.
- Neel Kashkari, Minneapolis. No voting record yet. Possibly dovish.
How the FOMC Affects 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, business 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. (Sources: "This Is the Fed's Hawk-to-Dove Scorecard," Bloomberg Businessweek, December 18, 2015. Where the FOMC Stands, CNBC, December 20, 2015. "About the FOMC," Board of the Federal Reserve System.)