The Federal Open Market Committee: Definition & Members

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Setting the Fed Funds rate isn't as easy as making a statement, as it sometimes appears in the press. Behind the scenes, the Federal Open Market Committee is busy figuring out how to use the Fed's balance sheet to manage monetary policy.

What is the Federal Open Market Committee (FOMC)?

The Federal Open Market Committee (FOMC) is an important part of the Federal Reserve Bank charged with using open market transactions (buying and selling bonds) to influence the Fed Funds rate, thereby helping manage the Fed's stated monetary policy.

Who is on the FOMC?

The FOMC is a twelve-member committee made up of members of the Federal Reserve Banks. The Chairman of the FOMC is also the Chairman of the Federal Reserve, and the Vice Chair of the FOMC is the President of the Federal Reserve Bank of New York. Those two members and positions don't change.

In addition to the Chair and Vice Chair, there are six other members from the Fed's Board of Governors and four other presidents from the 11 regional Federal Reserve Banks (excluding New York, which is always a member). The presidents of the regional Federal Reserve Banks rotate off the committee every year, which means they end up serving about once every three years.

What Does the FOMC do?

The FOMC meets eight times a year to talk about the economy and decide on the best direction to take their policy. If the committee is happy with the way things are looking, they won't change anything. If they worry about short-term economic growth, they may agree upon a strategy that will increase the money supply and lower interest rates. When the economy is growing and long-term price stability seems to be the greater risk, the FOMC may try to raise rates.

When the FOMC decides what action they feel is best after weighing the risk of short-term economic growth versus long-term price stability, they set the Fed Funds Target Rate. Often the press shortens this rate to the 'fed rate' or 'fed funds rate.' But it is important to realize it is a target rate. Even the Fed can't simply say what rates should be, and then simply by virtue of who said it, rates respond. Instead, the Fed sets their target rate and then the FOMC participates in open market operations to influence the rate.

Because of the inverse relationship between the price of bonds and their rate, if the FOMC wants rates to decrease, they buy bonds. When they buy bonds, they are putting money into the economy, and because they are increasing the demand for bonds, the price of those bonds increases. When bond prices increase, interest rates decrease. The opposite is also true; if the FOMC wants rates to increase, they sell bonds.

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