Federal Open Market Committee
The Federal Open Market Committee, or FOMC, is the Fed's chief body for monetary policymaking. Its voting membership combines the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and four other Reserve bank presidents, who serve one-year terms on a rotating basis. The chairman of the FOMC is also the chairman of the Board of Governors.
The FOMC typically meets eight times a year in Washington, D.C. At each meeting, a senior official of the Federal Reserve Bank of New York discusses developments in the financial and foreign exchange markets, as well as activities of the New York Fed's domestic and foreign trading desks. Staff from the Board of Governors then present their economic and financial forecasts. In addition, the Board's governors and all 12 Reserve bank presidents—whether they are voting members that year or not—offer their views on the economic outlook.
Armed with this wealth of up-to-date national, international and regional information, the FOMC discusses the monetary policy options that would best promote the economy's sustainable growth. After all participants have deliberated the options, members vote on a directive that is issued to the New York Fed's domestic trading desk. This directive informs the desk of the Committee's objective for "open market operations"—whether to ease, tighten or maintain the current policy. The desk then buys or sells U.S. government securities on the open market to achieve this objective.
How do open market operations actually work? Currently, the FOMC establishes a target for the federal funds rate (the rate banks charge each other for overnight loans). Open market purchases of government securities increase the amount of reserve funds that banks have available to lend, which puts downward pressure on the federal funds rate. Sales of government securities do just the opposite—they shrink the reserve funds available to lend and tend to raise the funds rate.
By targeting the federal funds rate, the FOMC seeks to provide the monetary stimulus required to foster a healthy economy. After each FOMC meeting, the funds rate target is announced to the public.
