Federal Reserve Chairman Jerome Powell will have a communications tightrope to walk.
What is the Federal Open Market Committee?
The Federal Open Market Committee (FOMC) is a committee of the United States Federal Reserve that sets monetary policy. The committee meets eight times a year to discuss domestic and overseas economic developments and determine the most appropriate monetary policy to support the economy.
The FOMC is led by the chairman of the Federal Reserve Board of Governors and has 12 voting members. These comprise the president of the Federal Reserve Bank of New York, the presidents of four of the other 11 Federal Reserve Banks (selected on a rotating basis), and the seven members of the Board of Governors. In addition to the voting members, FOMC meetings are attended by the non-voting Federal Reserve Bank presidents.
The task of the FOMC is to set monetary policy in order to fulfill the statutory mandates of the Federal Reserve. Congress has set three mandates for Fed monetary policy: price stability, maximum employment, and stable long-term interest rates. The first two are frequently referred to as the Fed’s dual mandate.
The FOMC sets the fed funds target rate at each of its eight annual meetings, and uses open market operations in order to keep the fed funds effective rate in line with the target rate.
The FOMC’s primary tools for fulfilling its mandates are as follows:
- The discount rate: The interest rate charged to commercial banks for loans from the Fed.
- Reserve requirements: The percentage of cash banks must hold against deposits.
- Open market operations: The purchase and sale of U.S. government securities.
Federal Open Market Committee example
When the FOMC meets, an official from the New York Fed makes a presentation on the current monetary situation. This is followed by presentations by officials from the various banks and the Board of Governors. These reports are discussed by the entire committee. After determining the best monetary policy, this is put to a vote by the 12 members of the FOMC.
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