Federal Open Market Committee (FOMC)
It is one of the three major decision-making bodies in the Federal Reserve System
The Federal Open Market Committee is one of the three major decision-making bodies in the Federal Reserve System. It is responsible for executing one of the Federal Reserve's three monetary policy instruments, open market operations (OMO).
The committee uses open market operations to change interest rates in the United States. The goal is to regulate the economy so that it either expands or contracts.
The Federal Reserve uses monetary policy action to ensure it meets the "dual mandate" objectives, namely, price stability and low unemployment.
The committee members are the Board of Governors, the New York bank president, and four bank presidents from the remaining eleven districts.
As of writing on July 18, 2022, the Committee members are:
- Jerome Powell, Chair of the Board of Governors and FOMC
- John C. Williams, Vice-Chair of the FOMC and President of the New York Bank
- Lael Brainard, Board of Governors Vice Chair
- Micheal S. Barr, Vice Chair for Supervision (since July 19, 2022)
- Michelle Bowman, Board of Governors member
- Lisa Cook, Board of Governors member
- Philip Jefferson, Board of Governors member
- Christopher Waller, Board of Governors member
- James Bullard, President of the St. Louis Bank
- Esther George, President of the Kansas City Bank
- Loretta Mester, President of the Cleveland Bank
- Susan M. Collins, President of the Boston Bank (since July 1, 2022)
The Federal Open Market Committee meets at least eight times a year. It often meets in late January, mid-March, early May, mid-June, late July, late September, early November, and December.
But, the committee sometimes meets more than eight times to address pressing issues. For example, in March 2020, the committee met five times to address economic problems arising from COVID-19 and the quarantine.
In 2022, the meeting times for the Open Market Committee are:
- January 25-26
- March 15-16
- May 3-4
- June 14-15
- July 26-27
- September 20-21
- November 1-2
- December 13-14
Note that these dates are subject to change. Each meeting's date is confirmed at the meeting before it. At the time of writing, the most recent meeting was July 26-27.
The Federal Reserve's website has the most up-to-date information on the Federal Open Market Committee, including meeting dates and committee members.
Are you looking for the latest information on the Federal Open Market Committee? Visit their official website.
Why Did the FOMC Only Have Ten Members Earlier in 2022?
If you keep up with the news, you may have noticed that the FOMC was short two members until mid-2022. To understand why that happened, we need to take a closer look at the three major bodies of the Federal Reserve System.
To summarize, the three major bodies are the Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee.
There are twelve Federal Reserve banks, one for each district, which may also have branches within their district. Each bank has its president and a team of economic researchers.
The banks, corresponding to district number, are located in:
- New York
- St. Louis
- Kansas City
- San Francisco
All three bodies in the Federal Reserve are interconnected. So, for example, the seven members of the Board of Governors are part of the committee.
In 2022 only six people were serving on the Board of Governors until July 19, when Micheal Barr began his term as a member of the Board of Governors.
Governors can serve one consecutive fourteen-year term. However, if they resign after serving part of a term, they can be renominated and confirmed to serve the remaining length. Governors are nominated by the US president and confirmed by Congress.
Randy Quarles resigned at the end of 2021, even though his term would expire in 2032. As a result, there was a vacancy on the Board of Governors, which Barr filled.
Four presidents from the remaining eleven bank districts serve one-year terms. These terms rotate every year. But, there were only three bank presidents on the FOMC until July 1, 2022.
While only the four chosen presidents and the New York bank president can vote, all bank presidents will usually attend.
Eric Rosengren, from the Boston bank, retired in September 2021. He was supposed to represent the Boston bank and its district in 2022. Instead, Susan M. Collins became the president of the Boston bank on July 1, 2022.
As a result, the Federal Open Market Committee was short two members – a bank president and a governor – until July 2022.
The bank presidents serving on the committee are selected three years ahead. Therefore, replacing or changing the rotation order may be difficult when appointed members resign or retire.
The Federal Open Market Committee also has alternate members who can vote on behalf of the four districts if the primary representative isn't present.
The alternate members are also selected ahead of time and must be from other districts. The alternate members are the official or interim presidents of another bank.
In 2022, the alternate members are:
- Cleveland for Chicago
- Richmond for Philadelphia
- Atlanta for Dallas
- San Francisco for Minneapolis
Note that for the New York bank, the alternate for the president is the first vice president.
The president of the New York bank always receives a seat on the FOMC and acts as the committee's vice-chairman. This is because the trading desk at the New York bank conducts open market operations.
What Happens at these meetings?
When they meet, the Federal Open Market Committee does three things.
First, the committee reviews the most prevalent and recent economic and financial conditions impacting the US. Each bank has a team of economists, as does the Board of Governors.
Then, the committee debates the appropriate monetary policy response and votes.
Finally, the committee assesses the Federal Reserve's dual mandate risks. Sometimes more objectives need to be considered-for example, stable economic growth.
The committee is formally responsible for deciding how to use OMO and setting the federal funds (FFR) rate. The federal funds rate is the interest rate banks charge to lend overnight to other banks.
The committee also advises on the reserve requirement and discount rate, other major monetary policy tools the Fed uses.
The reserve requirement is the number of deposited funds the bank cannot lend or invest but has to hold. The Board of Governors determines the reserve requirement.
A measure similar to the reserve requirement, the interest rate paid on reserves (IORB), is also decided by the Board of Governors. The IORB is often announced after the FOMC meets.
The Fed charges a discount rate for loans to financial institutions. The twelve Federal Reserve banks formally set the discount rate. But, in practice, it's held a fixed amount over the federal funds rate.
Because the whole Board of Governors attends Federal Open Market Committee meetings, decisions on the federal funds rate and, by extension, discount rate are made there.
The FOMC can also establish facilities to support monetary policy efforts. For example, the FOMC established the Standing Repo Facility in July 2021 to support its open market operations actions.
For those looking to learn more about the exact details of the meetings and policy decisions, the minutes are released online a few weeks after the meeting.
The Federal Reserve also provides a statement after each meeting. The release summarizes any relevant economic conditions or current events. It also describes monetary policy actions, the Fed's plans, and the intended outcome.
After some meetings, the chair will hold a press conference to announce any upcoming interest rate changes and major monetary policy actions. Naturally, markets react very sensitively to the press conference.
The chair will also summarize the FOMC's discussion during the meeting and what informed their decision. Finally, some Federal Reserve chairs will describe the economic forecast. Additionally, the chair will take questions from journalists.
Past press conferences can be found online, and Fed press conferences air life once the FOMC meeting ends.
What Are Open Market Operations (OMO)?
The Federal Reserve influences interest rates by affecting the money supply. The monetary base changes the money supply, which can be directly changed through OMO. Furthermore, OMO also affects the FFR.
The monetary base is all currency in circulation and all reserves in the banking system. Currency is essentially banknotes and coins. Reserves represent money held by banks.
(Though the Fed controls the monetary base, it doesn't control it completely. Currency in circulation also includes coins printed by the US Treasury.)
What's the difference between the money supply and the monetary base? The money supply is the monetary base multiplied by a "money multiplier." The "money multiplier" reflects how money in the economy is used.
Certain uses of money can "multiply" the money or "create" more. For instance, if someone deposits their money at a bank, the bank can now use the fraction of the deposit it doesn't have to hold as reserves to make loans or buy securities.
The money the bank uses then ends up in a different deposit account, and the cycle repeats. Changing the size of the monetary base changes the money supply, which leads to changes in the interest rate.
If the money supply shrinks, the interest rate increases because the amount of available money has decreased.
The interest rate impacts demand for investments in the overall economy. The change in demand for investments also changes aggregate demand. As aggregate demand changes, so do output. In turn, output affects the inflation rate.
There is an inverse relationship between interest rates and output. But, the relationship between output and inflation is direct.
Open market operations concern the purchase and sale of securities in the US market, typically from the US Treasury.
An "Open Market Purchase" is when the Fed purchases securities. For example, suppose the Fed chooses to buy $250 million in bonds. The Fed would give banks $250 million in reserves in return for $250 million in securities.
The banking system then receives $250 million of reserves. None of that $250 million becomes required reserves because they didn't originate from a deposit. As a result, the Fed has added exactly $250 million into the monetary base and increased the money supply.
The inverse happens if the Fed conducts an Open Market Sale, where it sells securities. The Fed would receive $250 million of reserves in return for the securities.
The banking system receives $250 million in securities but loses $250 million in reserves. As a result, the Fed shrinks the money supply.
It is important to note that government securities are assets to the Fed, while reserves are liabilities. This is because the Fed must pay interest on loan reserves but makes money through securities. To banks, securities and reserves are both assets.
The Federal Open Market Committee decides how to use OMO and which FFR to set. It can give specific instructions on which OMO tool to use and how much to buy or sell.
The FOMC issues orders to the New York Fed's Open Market trading desk ("the Desk"), which conducts the purchases.
For example, from the implementation note for the May 4, 2022 meeting:
"Effective May 5, 2022, the Federal Open Market Committee directs the Desk to:
- Undertake open market operations necessary to maintain the federal funds rate in a target range of 3/4 to 1 percent.
- Reinvest into agency mortgage-backed securities (MBS) the number of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar month of June exceeds a monthly cap of $17.5 billion."
Types of Open Market Operations
There are two main categories of open market operations – permanent OMOs and temporary OMOs.
Permanent OMOs essentially buy and sell assets for the Federal Reserve's portfolio. These assets are held in the System Open Market, or SOMA, account.
The holdings in the SOMA account serve three major purposes:
- First is collateral for the Federal Reserve's liabilities, such as banknotes in circulation.
- Adding or subtracting from the Fed's reserve balance as discussed above.
- Helping the Fed achieve its macroeconomic objectives, particularly low long-term interest rates.
SOMA was initially composed of US Treasury securities. These securities include Treasury bills, notes and bonds, floating-rate notes, and inflation-protected securities. The Fed also holds some debt from other federal agencies.
SOMA also includes foreign currency reserves held by the Fed. For example, the Fed holds Euros and Japanese yen. Some are held as foreign cash.
The rest of these foreign currency reserves are invested in highly liquid assets-specifically German, French, Dutch, and Japanese government securities.
Towards the end of March 2020, the New York Fed was ordered to buy "agency commercial mortgage-backed securities" (CMBS) for the SOMA. Government agencies or federally chartered corporations can only issue these bonds.
The New York Fed also deals with agency mortgage-backed securities (MBS). MBS are packages of home loans that function similarly to bonds. The Fed buys MBS and CMBS from a few of the same companies.
After the 2007 financial crisis, permanent OMOs were mainly used to decrease long-term interest rates and improve the financial environment.
Temporary OMOs address short-term issues with the balance of the reserve and the federal funds rate, such as fluctuations from routine banking actions.
Temporary actions can be further divided. There are repurchase agreements (repos) and reverse repurchase agreements (reverse repos or RRPs).
Repurchase agreements are a type of money market transaction. This means they are a very short-term and safe arrangement for securing lending.
A repurchase agreement is like a pawn shop. First, a customer sells the pawn shop something in return for much-needed cash. Then, both parties understand that the customer will later buy back that item at a higher price.
In the Fed's case, the Desk buys securities from an institution it has an agreement with to repurchase the security at a later date. Repo agreements increase reserves available to the banking system in the short term.
These efforts are supported by the aforementioned Standing Repo Facility (SRP). The SRP serves to slow pressure in the repo market upwards.
For reverse repurchase agreements, the Desk sells securities to a party bound by an agreement to sell them back to the Desk. As a result, reverse repos temporarily decrease reserves in the banking system.
The Fed's Overnight Reverse Repo facility (ON RRP) offers safe investment alternatives to financial institutions that aren't eligible to receive interest on reserves (IORB).
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