Federal Open Market Committee

The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under U.S. law with overseeing open market operations in the United States, and is the principal tool of US national monetary policy. (Open market operations are the buying and selling of government securities.) The Committee sets monetary policy by specifying the short-term objective for those operations, which is currently a target level for the federal funds rate (the rate that commercial banks charge on overnight loans among themselves). The FOMC also directs operations undertaken by the Federal Reserve System in foreign exchange markets, although any intervention in foreign exchange markets is coordinated with the U.S. Treasury, which has responsibility for formulating U.S. policies regarding the exchange value of the dollar.

FOMC Membership

The Federal Open Market Committee was created by statute currently codified at 12 U.S.C. § 263, and consists of twelve voting members: the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The Federal Reserve Bank of New York president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.

All of the Reserve Bank presidents, even those who are not currently voting members of the FOMC, attend Committee meetings, participate in discussions, and contribute to the Committee's assessment of the economy and policy options. The Committee meets eight times a year, roughly once every six weeks.

Meetings

By law, the FOMC must meet at least four times each year in Washington, D.C. Since 1981, eight regularly scheduled meetings have been held each year at intervals of five to eight weeks. If circumstances require consultation or consideration of an action between these regular meetings, members may be called on to participate in a special meeting or a telephone conference, or to vote on a proposed action by telegram or telephone. At each regularly scheduled meeting, the Committee votes on the policy to be carried out during the interval between meetings.

Attendance at meetings is restricted because of the confidential nature of the information discussed and is limited to Committee members, nonmember Reserve Bank presidents, staff officers, the Manager of the System Open Market Account, and a small number of Board and Reserve Bank staff.

The Decision-making Process

Before each regularly scheduled meeting of the FOMC, System staff prepare written reports on past and prospective economic and financial developments that are sent to Committee members and to nonmember Reserve Bank presidents. Reports prepared by the Manager of the System Open Market Account on operations in the domestic open market and in foreign currencies since the last regular meeting are also distributed. At the meeting itself, staff officers present oral reports on the current and prospective business situation, on conditions in financial markets, and on international financial developments. In its discussions, the Committee considers factors such as trends in prices and wages, employment and production, consumer income and spending, residential and commercial construction, business investment and inventories, foreign exchange markets, interest rates, money and credit aggregates, and fiscal policy. The Manager of the System Open Market Account also reports on account transactions since the previous meeting.

After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future and on the appropriate direction for monetary policy. Then each makes a more explicit recommendation on policy for the coming intermeeting period (and for the longer run, if under consideration).

Consensus

Finally, the Committee must reach a consensus regarding the appropriate course for policy, which is incorporated in a directive to the Federal Reserve Bank of New York—the Bank that executes transactions for the System Open Market Account. The directive is cast in terms designed to provide guidance to the Manager in the conduct of day-to-day open market operations. The directive sets forth the Committee's objectives for long-run growth of certain key monetary and credit aggregates. It also sets forth operating guidelines for the degree of ease or restraint to be sought in reserve conditions and expectations with regard to short-term rates of growth in the monetary aggregates. Policy is implemented with emphasis on supplying reserves in a manner consistent with these objectives and with the nation's broader economic objectives.

Stance on inflation

These policy makers tend to be divided in two camps: inflation doves and hawks.

Inflation doves tend to be equally concerned with economic growth and with keeping inflation moderate. Their critics believe they are more concerned with GDP growth than containing inflation. Therefore, doves are inclined to cut interest rates and favor ending interest rate hike cycles earlier than hawks. Notable doves are Alan Blinder and Janet Yellen.

Inflation hawks tend to be more concerned with taming inflation. Their critics believe they are not as concerned with the second half of the dual Congressional mandate, which is to promote economic growth. Federal Reserve Chairs seem to prefer to be considered hawks because the bond market treats hawks with more credibility, and accords them more flexibility. Former Fed Chairman Alan Greenspan had a sterling reputation which allowed him to leave interest rates low (Dovish policy) without igniting inflationary fears. Current Fed Chairman Ben Bernanke attempted to establish a reputation as a vigilant hawk, but the easing in 2007-2008 in response to the credit and US housing crises leaves him much more dovish than his European contemporary, Jean-Claude Trichet. In any case, such a reputation can only be earned over an extended term. Notable hawks have been Paul Volcker and William Poole.

Current Members

2008 Members of the FOMC

Members

• Ben S. Bernanke, Board of Governors, Chairman
• Timothy F. Geithner, New York, Vice Chairman
• Richard W. Fisher, Dallas
• Donald L. Kohn, Board of Governors
• Randall S. Kroszner, Board of Governors
• Frederic Mishkin, Board of Governors
• Sandra Pianalto, Cleveland
• Charles I. Plosser, Philadelphia
• Gary H. Stern, Minneapolis
• Kevin M. Warsh, Board of Governors

Alternate Members

• Charles L. Evans, Chicago
• Jeffrey M. Lacker, Richmond
• Dennis P. Lockhart, Atlanta
• Janet L. Yellen, San Francisco
• Christine M. Cumming, First Vice President, New York

Federal Reserve Bank Rotation on the FOMC
Committee membership changes at the first regularly scheduled meeting of the year.

2009 Members - New York, Chicago, Richmond, Atlanta, San Francisco

2009 Alternate Members - New York, Cleveland, Boston, St. Louis, Kansas City

See also

• Federal Funds Rate

References

• Federal Open Market Committee: official site

External links

• Federal Open Market Committee: official site
• Federal Reserve Bank of Philadelphia: A Day in the Life of the FOMC
• University of Rochester: Shadow Open Market Committee
• Federal Reserve Board: Come with Me to the FOMC
• What happens to the markets on "Fed Days" Fed Day Charts