What is the Federal Open Market Committee (FOMC)?
The Federal Open Market Committee (FOMC) is responsible for the monetary policy of the United States by overseeing the open market operations of the country. The FOMC is a part of the Federal Reserve System. Headed by the chair, Jerome H. Powell, the committee comprises twelve total members, including the CEO of the Federal Reserve Bank of New York, John C. Williams, as the vice-chair.
The FOMC meets eight times a year to discuss the appropriate view on monetary policy and review existing financial and economic conditions. The long-term goals of the FOMC are to ensure sustainable economic growth for the United States and guarantee price stability. As adopted on January 24, 2012 and reaffirmed as of January 26, 2021, the FOMC’s monetary policy strategy includes promoting moderate long-term interest rates; the committee also formulates employment and inflation objectives.
The Federal Open Market Committee’s Functions
Along with the Federal Reserve Board of Governors, the FOMC controls three monetary policy tools: the discount rate, reserve requirements, and open market operations. The Federal Reserve Board of Governors controls the discount rate and reserve requirements, whereas the FOMC controls open market operations.
The FOMC sets the federal funds target rate; arguably, one of the most important economic factors in the world. The federal funds target rate, also known as the overnight rate, refers to the interest rate at which banks and financial institutions can borrow or lend from each other overnight.
The FOMC reacts to inflation or deflation by adjusting the federal funds target rate in accordance with its mandate to ensure price stability. The target federal funds target rate for developed economies is typically around 2% in “normal” times.
The Federal Open Market Committee’s Operations
Below is a deeper look into the FOMC’s open market operations and monetary policy decisions.
Open Market Operations
Open market operations are when the FOMC buys or sells U.S. Treasury securities to give or take liquidity in the domestic currency in the open markets. Aside from buying or selling government bonds, the FOMC conducts open market operations by entering into secured lending transactions or repurchase agreements with a commercial bank or financial institution.
Essentially, the above operations involve the central bank taking an asset from the commercial bank or financial institution and giving a cash deposit. Open market operations are done to provide liquidity and influence the money supply and short-term interest rates.
The Federal Reserve and the FOMC can employ an expansionary or contractionary monetary policy to carry out their goals and mandates. To promote economic growth and slash unemployment, the two federal agencies can implement an expansionary monetary policy, which includes either increasing the money supply or decreasing the federal funds target rate. It can also deploy both strategies.
Increasing the money supply is done by printing more money and buying securities in the open market to inject the money into the economy. However, the Federal Reserve and FOMC cannot keep boosting the economy forever through such methods as inflation can rise drastically. When inflation gets to a point that is too high, they will employ a contractionary monetary policy.
A contractionary monetary policy includes increasing the federal funds target rate (making it more expensive to borrow) and/or restricting the money supply. The money supply is restricted by selling securities on the open market; doing so brings deflationary pressure and increases the value of the currency.
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