Federal Open Market Committee
Encyclopedia
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System
, is charged under United States law with overseeing the nation's open market operations (i.e., the Fed's buying and selling of United States Treasury securities). It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply. It is the principal organ of United States national monetary policy. The Committee sets monetary policy
by specifying the short-term objective for the Fed's open market operations, which is currently a target level for the federal funds rate
(the rate that commercial banks charge between themselves for overnight loans).
The FOMC also directs operations undertaken by the Federal Reserve System in foreign exchange market
s, although any intervention in foreign exchange markets is coordinated with the U.S. Treasury, which has responsibility for formulating U.S. policies regarding the exchange value of the dollar.
president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of banks, one bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.
All of the Reserve Bank presidents, even those who are not currently voting members of the FOMC, attend Committee meetings, participate in discussions, and contribute to the Committee's assessment of the economy and policy options. The Committee meets eight times a year, approximately once every six weeks.
By law, the FOMC must meet at least four times each year in Washington, D.C. Since 1981, eight regularly scheduled meetings have been held each year at intervals of five to eight weeks. If circumstances require consultation or consideration of an action between these regular meetings, members may be called on to participate in a special meeting or a telephone conference, or to vote on a proposed action by proxy
. At each regularly scheduled meeting, the Committee votes on the policy to be carried out during the interval between meetings, requiring members to think ahead.
Attendance at meetings is restricted because of the confidential nature of the information discussed and is limited to Committee members, nonmember Reserve Bank presidents, staff officers, the Manager of the System Open Market Account, and a small number of Board and Reserve Bank staff.
After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future and on the appropriate direction for monetary policy. Then each makes a more explicit recommendation on policy for the coming intermeeting period (and for the longer run, if under consideration).
, now practiced by many Central Banks. Under inflationary pressure in 1979, the Fed temporarily abandoned interest rate targeting in favor of targeting non-borrowed reserves. It concluded, however, that this approach led to increased volatility in interest rates and monetary growth, and reversed itself in 1982. Current Fed Chairman Ben Bernanke
spoke sympathetically as a Governor in 2003 of the inflation targeting
approach. He explained that even a Central Bank like the Fed, which does not orient its monetary policies around an explicit, published inflation target, nonetheless takes account of its goal of low and stable inflation in formulating its interest rate targets. Bernanke summed up his overall assessment of inflation targeting as follows:
In keeping with his 2003 speech as Governor, Bernanke as Chairman has attempted to promote greater transparency in Fed communications. The Fed now indicates publicly the range within which it would like to see future inflation.
Members
Alternate Members
Federal Reserve Bank Rotation on the FOMC
Committee membership changes at the first regularly scheduled meeting of the year.
2011 Members - New York, Chicago, Philadelphia, Dallas, Minneapolis
2011 Alternate Members - New York, Cleveland, Richmond, Atlanta, San Francisco
(Note: For the Federal Reserve Bank of New York, the First Vice President is the alternate for the President.)
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, is charged under United States law with overseeing the nation's open market operations (i.e., the Fed's buying and selling of United States Treasury securities). It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply. It is the principal organ of United States national monetary policy. The Committee sets monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
by specifying the short-term objective for the Fed's open market operations, which is currently a target level for the federal funds rate
Federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend...
(the rate that commercial banks charge between themselves for overnight loans).
The FOMC also directs operations undertaken by the Federal Reserve System in foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
s, although any intervention in foreign exchange markets is coordinated with the U.S. Treasury, which has responsibility for formulating U.S. policies regarding the exchange value of the dollar.
Membership
The Federal Open Market Committee was formed by the Banking Act of 1933 (codified at ), and did not include voting rights for the Board of Governors. The Banking Act of 1935 revised these protocols to include the Board of Governors and to closely resemble the present-day FOMC, and was amended in 1942 to give the current structure of twelve voting members: the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The Federal Reserve Bank of New YorkFederal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of banks, one bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.
All of the Reserve Bank presidents, even those who are not currently voting members of the FOMC, attend Committee meetings, participate in discussions, and contribute to the Committee's assessment of the economy and policy options. The Committee meets eight times a year, approximately once every six weeks.
Meetings
Proxy voting
Proxy voting has two forms: delegable voting and delegated voting, which are procedures for the delegation to another member of a voting body of that member's power to vote in his absence, and/or for the selection of additional representatives, as in the case with transitive proxies...
. At each regularly scheduled meeting, the Committee votes on the policy to be carried out during the interval between meetings, requiring members to think ahead.
Attendance at meetings is restricted because of the confidential nature of the information discussed and is limited to Committee members, nonmember Reserve Bank presidents, staff officers, the Manager of the System Open Market Account, and a small number of Board and Reserve Bank staff.
Decision-making process
Before each regularly scheduled meeting of the FOMC, System staff prepare written reports on past and prospective economic and financial developments that are sent to Committee members and to nonmember Reserve Bank presidents. Reports prepared by the Manager of the System Open Market Account on operations in the domestic open market and in foreign currencies since the last regular meeting are also distributed. At the meeting itself, staff officers present oral reports on the current and prospective business situation, on conditions in financial markets, and on international financial developments. In its discussions, the Committee considers factors such as trends in prices and wages, employment and production, consumer income and spending, residential and commercial construction, business investment and inventories, foreign exchange markets, interest rates, money and credit aggregates, and fiscal policy. The Manager of the System Open Market Account also reports on account transactions since the previous meeting.After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future and on the appropriate direction for monetary policy. Then each makes a more explicit recommendation on policy for the coming intermeeting period (and for the longer run, if under consideration).
Consensus
Finally, the Committee must reach a consensus regarding the appropriate course for policy, which is incorporated in a directive to the Federal Reserve Bank of New York—the Bank that executes transactions for the System Open Market Account. The directive is cast in terms designed to provide guidance to the Manager in the conduct of day-to-day open market operations. The directive sets forth the Committee's objectives for long-run growth of certain key monetary and credit aggregates. It also sets forth operating guidelines for the degree of ease or restraint to be sought in reserve conditions and expectations with regard to short-term rates of growth in the monetary aggregates. Policy is implemented with emphasis on supplying reserves in a manner consistent with these objectives and with the nation's broader economic objectives.Congressional oversight
Under the Federal Reserve Act, the Chairman of the Board of Governors of the Federal Reserve System must appear before Congressional hearings at least twice per year regarding “the efforts, activities, objectives and plans of the Board and the Federal Open Market Committee with respect to the conduct of monetary policy”. The statute requires that the Chairman appear before the House Committee on Banking and Financial Services in February and July of odd numbered years, and before the Senate Committee on Banking, Housing, and Urban Affairs in February and July of even numbered years.Interest Rate Targeting: Criticism and Alternatives
The committee's practice of interest rate targeting has been criticized by some commentators who argue that it may risk an inflationary bias. Possible alternative rules that enjoy some support among economists include the traditional monetarist formula of targeting stable growth in an appropriately-chosen monetary aggregate, and inflation targetingInflation targeting
Inflation targeting is an economic policy in which a central bank estimates and makes public a projected, or "target", inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.Because interest rates and the...
, now practiced by many Central Banks. Under inflationary pressure in 1979, the Fed temporarily abandoned interest rate targeting in favor of targeting non-borrowed reserves. It concluded, however, that this approach led to increased volatility in interest rates and monetary growth, and reversed itself in 1982. Current Fed Chairman Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
spoke sympathetically as a Governor in 2003 of the inflation targeting
Inflation targeting
Inflation targeting is an economic policy in which a central bank estimates and makes public a projected, or "target", inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.Because interest rates and the...
approach. He explained that even a Central Bank like the Fed, which does not orient its monetary policies around an explicit, published inflation target, nonetheless takes account of its goal of low and stable inflation in formulating its interest rate targets. Bernanke summed up his overall assessment of inflation targeting as follows:
Inflation targeting, at least in its best-practice form, consists of two parts: a policy framework of constrained discretion and a communication strategy that attempts to focus expectations and explain the policy framework to the public. Together, these two elements promote both price stability and well-anchored inflation expectations; the latter in turn facilitates more effective stabilization of output and employment. Thus, a well-conceived and well-executed strategy of inflation targeting can deliver good results with respect to output and employment as well as inflation.
Although communication plays several important roles in inflation targeting, perhaps the most important is focusing and anchoring expectations. Clearly there are limits to what talk can achieve; ultimately, talk must be backed up by action, in the form of successful policies. Likewise, for a successful and credible central bank like the Federal Reserve, the immediate benefits of adopting a more explicit communication strategy may be modest. Nevertheless, making the investment now in greater transparency about the central bank's objectives, plans, and assessments of the economy could pay increasing dividends in the future.
In keeping with his 2003 speech as Governor, Bernanke as Chairman has attempted to promote greater transparency in Fed communications. The Fed now indicates publicly the range within which it would like to see future inflation.
Current members
The members of the FOMC during 2011 are:Members
- Ben S. Bernanke, Board of Governors, Chairman
- William C. Dudley, New York, Vice Chairman
- Elizabeth A. Duke, Board of Governors
- Charles L. EvansCharles L. EvansCharles L. Evans is the ninth president and chief executive officer of the Federal Reserve Bank of Chicago. In that capacity, he serves on the Federal Open Market Committee , the Federal Reserve System's monetary policy-making body.Before becoming president in September 2007, Evans served as...
, Chicago - Richard W. FisherRichard W. FisherRichard W. Fisher is currently the President and CEO of the Federal Reserve Bank of Dallas, having assumed that post in April, 2005.-Career:...
, Dallas - Narayana KocherlakotaNarayana KocherlakotaNarayana Kocherlakota is an American economist and is the 12th and current president of the Federal Reserve Bank of Minneapolis.- Early life and education :...
, Minneapolis - Charles I. Plosser, Philadelphia
- Sarah Bloom RaskinSarah Bloom RaskinSarah Bloom Raskin is an American attorney and regulator, who is currently a member of the Board of Governors of the Federal Reserve System. Previously, she served as Maryland Commissioner of Financial Regulation.-Early life and education:...
, Board of Governors - Daniel K. TarulloDaniel TarulloDaniel Tarullo is a professor of Law at Georgetown University Law Center and a member of the Board of Governors of the United States Federal Reserve Board since January 28th, 2009...
, Board of Governors - Janet L. Yellen, Board of Governors
Alternate Members
- Jeffrey M. LackerJeffrey M. LackerJeffrey M. Lacker is an American economist and president of the Federal Reserve Bank of Richmond. He is also a voting member of the Federal Open Market Committee for the year of 2009. Formerly, he was senior vice president and the director of research at the Federal Reserve Bank of...
, Richmond - Dennis P. LockhartDennis P. LockhartDennis P. Lockhart is President and CEO of the Federal Reserve Bank of Atlanta. He assumed office on March 1, 2007.From 2003 to 2007, Lockhart served on the faculty of the Master of Science in Foreign Service Program at Georgetown University's Walsh School of Foreign Service. He also was an...
, Atlanta - Sandra PianaltoSandra PianaltoSandra Pianalto took office on February 1, 2003, as the tenth chief executive of the Fourth District Federal Reserve Bank, at Cleveland....
, Cleveland - John C. Williams, San Francisco
- Christine M. Cumming, First Vice President, New York
Federal Reserve Bank Rotation on the FOMC
Committee membership changes at the first regularly scheduled meeting of the year.
2011 Members - New York, Chicago, Philadelphia, Dallas, Minneapolis
2011 Alternate Members - New York, Cleveland, Richmond, Atlanta, San Francisco
(Note: For the Federal Reserve Bank of New York, the First Vice President is the alternate for the President.)
See also
- Federal Funds
- Monetary Policy CommitteeMonetary Policy CommitteeThe Monetary Policy Committee is a committee of the Bank of England, which meets for two and a half days every month to decide the official interest rate in the United Kingdom . It is also responsible for directing other aspects of the government's monetary policy framework, such as quantitative...
, the equivalent organ of the United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
's Bank of EnglandBank of EnglandThe Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, and modeled in part on the FOMC - Fed Funds ProbabilityFed Funds ProbabilityFederal funds probability is the probability of actions taken by the Federal Reserve System of the United States at upcoming Federal Open Market Committee meetings. At every meeting of the FOMC, its members decide whether to increase, decrease, or leave the Federal funds rate unchanged after...
External links
- Federal Open Market Committee: official site
- Federal Reserve Bank of Philadelphia: A Day in the Life of the FOMC
- University of Rochester: Shadow Open Market Committee
- Federal Reserve Board: Come with Me to the FOMC
- What happens to the markets on "Fed Days" Fed Day Charts
- Minutes of FOMC meetings