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What is the Federal Open Market Committee?

2016-09-24T15:35:02+00:00

The term 'Federal Open Market Committee' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

The Federal Open Market Committee is a group within the Federal Reserve, the central bank for the United States. This central bank is more commonly known as the Fed. They carry out actions of monetary policy. This impacts the cost and readily available quantity of money and credit. The Fed uses these tools to foster the country’s economic goals. Thanks to the Federal Reserve Act of 1913, the Fed gained the authority to set the national monetary policy.

Under the mantle of the Federal Reserve are three different monetary policy tools. These are reserve requirements, the discount rate, and open market operations. It is the Federal Reserve System Board of Governors that carries out the task of setting the reserve requirements and the discount rate. The Federal Open Market Committee handles the Fed’s open market operations.

With these three different tools, the Fed is able to influence the supply of and demand for balances that the financial institutions keep inside the Federal Reserve Banks. This is how it affects the federal funds rate. This is the interest rate that banks and other financial institutions are willing to loan money from their Federal Reserve accounts to other such institutions on an overnight basis.

When the federal funds rate changes, this sets off events which impact foreign exchange rates, other types of shorter term interest rates, longer term interest rates, and the quantity of money and credit in the economy. Eventually this affects a number of important economic indicators like economic output, employment, and the costs for goods and services.

Open market operations are the main tool that the Federal Reserve uses to carry out American monetary policy. Specifically they buy and sell government securities like Treasuries and T-Bills. They do this in the open market so that they can contract or expand the quantity of money that exists in the banking system. When they buy securities, it puts money into the banking system. This boosts growth in the economy. When they sell their securities, they withdraw money from the system. This shrinks the economy. Ultimately it is the federal funds rate the Federal Open Market Committee is trying to adjust with these operations.

The Federal Open Market Committee is made up of twelve members in total. These are comprised of the Federal Reserve System Board of Governors’ seven members, the Federal Reserve Bank of New York President, and four of the other eleven Presidents of the Reserve Banks. These other Reserve Bank Presidents rotate in and out serving one year terms. Rotating seats have a special order in which they are filled. There are four groups of Banks which each contribute a Bank President to the voting Federal Open Market Committee. The groups are Richmond, Philadelphia, and Boston; Chicago and Cleveland; Dallas, Atlanta, and St. Louis; and San Francisco, Kansas City, and Minneapolis.

Those Reserve Bank Presidents who are not voting members of the committee in a given year still attend all of the committee meetings, make their contributions to the economy and policy choices assessments, and take part in all discussions.

Every year the Federal Open Market Committee engages in eight routinely scheduled meetings. In these meetings, the committee does a number of important activities. It reviews national financial and economic conditions, considers the risks to maintainable economic growth and long term price stability, and decides on its monetary policy appropriate stance.

The FOMC legally is authorized to set its own internal organization. They have a tradition of electing the Board of Governors Chair to be the Chair of the FOMC and selecting the New York Federal Reserve Bank President to be the vice chair. The eight annual meetings occur in Washington D.C.

The term 'Federal Open Market Committee' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.