Federal Open Market Committee (FOMC)

The Federal Open Market Committee is the monetary policymaking unit of the U.S. Federal Reserve. The Fed conducts monetary policy by manipulating short-term interest rates and by buying and selling U.S. government securities in order to achieve its congressional mandate of seeking maximum employment and stable prices.

The FOMC is composed of 12 members—the seven members of the Fed's Board of Governors and five of the 12 presidents of the regional Federal Reserve banks. The chairman of the Fed's board of governors—Jerome Powell as of December 2018—also serves as the chairman of the FOMC. The president of the Federal Reserve Bank of New York—John Williams as of December 2018—is vice chairman of the committee and a permanent member.^[1]

The New York Fed's Role

The New York Fed holds a singular place on the FOMC because Wall Street is part of its district, as well as the fact that it has "several unique responsibilities" that the other regional Fed banks don't have, including implementing the Fed's open market operations.^[2]

The New York Fed also has regulatory oversight of domestic depository institutions, which includes most of the largest banks in the country, in addition to branches and agencies of foreign banks in its district. The New York Fed intervenes in foreign exchange markets to ensure that the Fed's dollar exchange rate policy objectives are carried out and to "counter disorderly conditions in foreign exchange markets."^[2] The bank also acts as the primary U.S. contact with other foreign central banks.

The New York Fed oversees the Second Federal Reserve District, which includes New York state, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the U.S. Virgin Islands. Despite that relatively small geographic reach compared to the other Fed banks, the New York Fed is the largest one in terms of assets and activity volume.^[2]

The presidents of the other regional Fed banks fill the remaining four voting seats on the FOMC on a rotating basis beginning on 1 January of each year. The rotating seats are filled from the following four groups of banks, one from each group: Boston, Philadelphia and Richmond; Cleveland and Chicago; Atlanta, St. Louis and Dallas; and Minneapolis, Kansas City and San Francisco. However, all of the regional Fed bank presidents, including those who are not voting members, attend the FOMC's meetings and participate in the discussions.^[3]

FOMC Meetings

The FOMC has eight scheduled meetings a year (about every six weeks) that generally last for two days, typically a Tuesday and Wednesday. The committee may also hold unscheduled meetings as it deems necessary. At the end of each meeting, which usually ends on Wednesday afternoon, the committee issues a policy statement at 2 p.m. EST that summarises the committee's economic outlook and the policy decision made at that meeting. In addition, the Fed issues a full set of the minutes of the meeting three weeks later; complete transcripts are published five years later.^[1]

Four times per year—usually after the March, June, September and December meetings—the Fed chairman holds a press conference to provide additional information about the FOMC's decisions. The Fed at that time also releases its updated economic projections.^[1]

Open Market Operations

The FOMC sets the federal funds rate, its benchmark interest rate, which is the interest rate banks pay to borrow and lend money to each other overnight that they hold on deposit at the Fed. This rate has a large effect on the general level of interest rates for both businesses, consumers and governments throughout the economy, both short- and long-term.

The Fed has three tools to implement its interest rate target and monetary policy: open market operations, the discount rate, and reserve requirements. The FOMC is responsible for open market operations, while the Fed board of governors is responsible for the other two functions.

Permanent OMOs

Permanent OMOs involve outright purchases or sales of securities for the Fed's portfolio. During and after the financial crisis, the Fed bought trillions of dollars of U.S. Treasury securities and government-insured mortgage-backed securities in order to try to drive down long-term interest rates in the overall market and to make financial conditions more accommodative. The Fed has stopped its purchases of these securities and is reducing its portfolio (as of December 2018) by allowing those bonds to run off as they mature.^[4]

Temporary OMOs

Temporary OMOs are used to "address reserve needs that are deemed to be transitory in nature."^[4] These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos or RRPs).

• In a repo, the Fed buys a security, usually a Treasury bond, and agrees to sell it back to the owner at a specified higher price. A repo is essentially a collateralised loan. The Fed does this to add temporary reserves to the financial system.
• In a reverse repo, the Fed sells a security and agrees to buy it back later, in effect temporarily draining reserves from the system. The Fed does this in order to keep the federal funds rate in the target range established by the FOMC.

Summary

The Federal Open Market Committee is the monetary policymaking unit of the U.S. Federal Reserve. The Fed conducts monetary policy by controlling short-term interest rates and by buying and selling U.S. government securities in order to achieve its congressional mandate of seeking maximum employment and stable prices. The FOMC implements Fed monetary policy through open market operations, which include the purchase and sale of securities in the open market.