Introduction to the Federal Open Market Committee
The financial market tends to get eerily quiet for two days, eight months out of the year, before a big move hits, sometimes a rally and sometimes a drop. This is the market’s reaction to the Federal Open Market Committee (FOMC) interest rate decision. The FOMC’s decision can ripple through the U.S. economy—and sometimes the global economy—right down to your wallet.
What does the FOMC do?
The Federal Open Market Committee (FOMC) is the policymaking group of the Federal Reserve System. Its 12 members include seven Fed board governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Fed bank presidents, who enter and exit the FOMC on a rotating basis. The FOMC sets these tools into motion to achieve its dual mandate to maintain stable prices and maximum employment.
Key Responsibilities of the FOMC
The FOMC has several key responsibilities, including:
- Setting the federal funds rate target, which influences all borrowing costs throughout the entire financial system.
- Conducting open market operations (OMOs) to keep the fed funds rate at or near its target.
- Creating and publishing the members’ policy projections (the "Fed dot plot").
- Balance sheet operations to influence long-term interest rates.
A Brief History of the FOMC
Before 1933, each regional Fed bank ran its own monetary policy independent of the others. This lack of unity made it difficult for the 12 Fed banks to respond effectively to the Great Depression. As part of the Banking Act of 1933, Congress created the FOMC, giving the Fed a centralized body to coordinate decisions and actions.
The FOMC Meeting Schedule
The FOMC meets eight times annually, although the actual dates vary from year to year. The meetings are typically spaced six weeks apart, giving the members enough time to digest and respond to economic data. If economic developments arise, the FOMC can call emergency meetings to take swift action outside the regular schedule.
Who’s in the Room When the FOMC Makes its Decisions?
The FOMC consists of 12 members, including the seven members of the Federal Reserve’s Board of Governors, the president of the Federal Reserve Bank of New York, and four Federal Reserve bank presidents from the 11 remaining regions.
Participants and Voting Rights
| Here is a breakdown of the participants and their voting rights: | Participants | Number | Voting Rights | Notes |
|---|---|---|---|---|
| Board of Governors | 7 | Always | Nominated by the U.S. President and confirmed by the Senate | |
| NY Fed President | 1 | Always | Executes open market operations through the NY Fed’s trading desk | |
| Other regional Fed presidents | 11 | 4 rotating voting rights | Only four vote, but all regional presidents participate in the FOMC meetings |
The Difference Between the Fed’s Board of Governors and the FOMC
Some people confuse the two groups, but the Governors and the FOMC are categorically separate entities. The FOMC sets monetary policy, while the Board of Governors manages every operation of the entire Federal Reserve System.
What Happens on "Fed Day"
On the day of the FOMC meeting, a statement is issued at 2 p.m. ET announcing the rate decision, along with a current economic assessment and the rationale behind the decision. Roughly 30 minutes later, the Fed chair holds a press conference to reiterate the FOMC’s policy decisions and rationale and address questions from the media.
Conclusion
The FOMC may be one of the least understood, yet most impactful institutions shaping everyday life. FOMC decisions can significantly sway the direction of interest rates, the job market, the prices of goods and services, and, perhaps most noticeably, the stock market. By understanding the FOMC and its role in setting monetary policy, you can better navigate the financial landscape and make informed decisions about your own financial situation.
