Question

What is the purpose of the Federal Open Market Committee (FOMC)? You can go to the website for the Board of Governors of the Federal Reserve System: Federal Reserve. (n.d.). Monetary policy. Retrieved from https://www.federalreserve.gov/monetarypolicy/fomc.htm

Answer 1

The Federal Open Market Committee (FOMC) is the voting body of the Federal Reserve System. It is made up of 12 members: the seven board of governors, the president of the regional New York Fed, and four other Reserve Bank presidents located throughout the country. The board and the New York Fed president have permanent voting positions, while the four regional bank presidents rotate on and off the board annually.

The FOMC, specifically, is one of three branches within the Federal Reserve System (the FOMC, the board of governors, and the 12 regional reserve banks).

Purpose:

1) FOMC is the only body in the federal reserve system that decides on whether to raise, lower, or maintain interest rates.

2) FOMC decides what to do with the Fed’s benchmark interest rate, the federal funds rate, which influences other borrowing costs throughout the financial system, such as credit card and home equity lines of credit (HELOC) rates, as well as yields on savings accounts and certificates of deposit (CDs).

3) Fed officials of FOMC pay attention to broader economic and financial market indicators when deciding what to do with interest rates. Specifically, these officials have what’s called a dual mandate, meaning two economic objectives: stable prices and maximum employment.

4) It shall be noted that FOMC decides on more than just adjusting interest rates. It also conducts open market operations, where it buys and sells securities. That process formally called “large-scale asset purchases” but more colloquially known as “quantitative easing,” can influence longer-term interest rates, while also expanding or contracting the money supply.

5) The task of the FOMC is to set monetary policy in order to fulfill the statutory mandates of the Federal Reserve. Congress has set three mandates for Fed monetary policy: price stability, maximum employment, and stable long-term interest rates. The first two are frequently referred to as the Fed’s dual mandate.

6) It meets eight times a year to discuss domestic and overseas economic developments and determine the most appropriate monetary policy to support the economy. It uses open market operations in order to keep the fed funds effective rate in line with the target rate.