The Federal Open Market Committee (FOMC) is a governing body that sets monetary policy for the Federal Reserve System. It’s made up of 12 members. These members include 7 members of the Board of Governors and 5 of the 12 Reserve Bank presidents. The Chairman of the Board of Governors also serves as the Chairman of the FOMC. And, the president of the Federal Reserve bank of New York is a permanent member of the committee.
That person also sits as the vice Chairman of the Committee.
Presidents of the other Reserve Banks fill in the four remaining positions on the FOMC and rotate through positions periodically. All reserve bank presidents attend FOMC meetings and they participate in discussions about the economy as well as policy options.
There are typically 8 meetings a year, with them being held once every 6 or so weeks. The committee also holds unscheduled meetings as necessary. The FOMC regularly issues a policy statement that summarizes what the committee talked about. It includes the economic outlook for the nation and the policy decision at the meeting.
The Chairman holds a press conference 4 times per year to discuss their board’s decisions. A full set of minutes for eat meeting is published three weeks after the conclusion of each regular meeting. Complete transcripts are published five years after every meeting.
The Federal Reserve conducts monetary policy, by law, and its objective is to achieve its macroeconomic objectives which include maximum employment and stable prices. Usually, the FOMC adjusts its policy using short-term interest rates in response to the current economic outlook.
According to http://moneymorning.com/tag/fomc-meeting/, these meetings are some of the most important for investors because short term interest rates can drive the direction of the economy and investments for most investors.
The Decision-Making Process
Before every scheduled meeting, the staff prepare written reports on past economic and financial developments. These are sent to the committee members and nonmember reserve bank presidents. Reports are put together by the Manager of the System Open Market Account on operations in the domestic open market and in foreign currencies.
The most obvious task is to stabilize prices in the economy. Most investors understand the basic function of the Fed and its monetary policy objectives. When the Fed changes its interest rate target, it can dramatically affect how businesses perceive the economic outlook for the nation.
For example, low interest rates send a signal that borrowing will be low-cost. This increases the incentive to borrow money for future investment. If short-term rates are low, then businesses can borrow money to expand operations.
This discourages savings, too, as lower short-term rates mean that banks and financial institutions won’t pay very high rates of return on savings accounts, bank certificates of deposit, money markets, and annuity policies.
These classic savings vehicles are often offered by banks and insurance companies to the general public and to investors and they set the “tone” for the rest of the market. For instance, if short term and fixed rates are low, it encourages more investment in the stock market and other speculative markets because investors will seek higher yields that they can no longer get from fixed rates.
When interest rates rise, however, it may send the opposite signal. When short-term rates rise, it may tell investors that fixed and short-term rates are more favorable for investment purposes. But, it also tells businesses that borrowing may be more expensive. So, business lending may slow down, and businesses may look elsewhere for capital or they may slow down business growth.
The Committee must reach a consensus before they can decide on a policy. If they do not, then they must continue to deliberate. Once a consensus is reached, it is incorporated in a directive to the Federal Reserve Bank of New York, which is the bank that executes transactions for the System Open Market Account.
This directive is designed to give guidance to the manager in the conduct of day-to-day open market operations.
Under The Federal Reserve Act, The Chairman of the Federal Reserve has to come before the Congressional hearings at least two times per year and discuss the efforts and activities of the Board and the Federal Open Market Committee.
There is some criticism by financial experts and commentators that the Federal Reserve has an inflation bias, because its mandate is for maximum employment and it may seek to achieve this by encouraging business growth and expansion through lower interest rates, which also may cause inflation.
Emma Miah works in finance. Numbers are her passion and she enjoys keeping up with the stock exchange and world economy for both work and pleasure. Her articles appear on a range of financial based blogs.
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