What does FOMC stand for?
FOMC stands for Federal Open Market Committee.
What is FOMC?
FOMC, or the Federal Open Market Committee, represents the twelve-member committee that determines US monetary policy within the Federal Reserve System (the Fed). FOMC comprises seven members on the board of governors and five presidents of Federal Reserve banks.
The Federal Open Market Committee, called FOMC in short, is an arm of the Federal Reserve System. There are twelve members on this committee – the Federal Reserve Bank of New York’s president, seven Board of Governor members, and the remaining four members are from the eleven presidents of Reserve Bank on a rotating basis. All these twelve members of the FOMC are collectively responsible for directing open market operations with the sole aim of regulating the direction of monetary policy.
Whenever the news reports any change in interest rate, it can automatically be assumed that it is the outcome of one of the Federal Open Market Committee meetings.
What does the FOMC do?
- FOMC is responsible for the formulation of monetary policy, maintain stable prices and economic growth
- Manage unemployment and inflation
- FOMC manages US money supply
- Control the reserve requirement
- Control Interest on excess reserves
- Control open market operations
- Control the discount rate
- FOMC sets a target range for the FED funds rate
The Federal Open Market Committee’s sole purpose is to boost the national economy. To achieve this goal, eight meetings per year are organized so that all the twelve members can sit together and discuss whether or not any changes should be made in the near-term monetary policy. If the need arises, more such meetings can also be organized. In these meetings, if there is even a single vote to bring changes in the policy, that would cause putting the US government securities in the open market for its sale or purchase for the economy’s welfare.
How does FOMC affect forex?
FOMC announcements affect the US dollar price and the whole forex market. The biggest impact has committee votes related to the increase and decrease of interest rates, monetary policies, all unemployment, and inflation announcements.
The Federal Reserve has the power to influence open market operations, bank reserve requirements, and discount rates, which enables it to bring about a change in the supply of money. While the Fed’s Board of Governors is responsible for fixing the reserve requirements and discount rates, FOMC controls open market operations that call for buying or selling government securities. For instance, the Fed will sell government securities to tighten the money supply and decrease money available with the banks.
If the Federal Open Market Committee decides to purchase government securities, all of those get deposited into the Fed’s System Open Market Account (SOMA). SOMA has both domestic and foreign portfolios. The former holds Federal Agency securities and US Treasuries, while the latter holds investments denominated in yen and euros.
Only the Reserve Bank of New York has the power to execute Fed’s open market operations. Still, each of the twelve regional Reserve Bank holds a certain percentage of the SOMA holdings of the Fed. As per the Monetary Control Act of 1980 and Federal Reserve Act of 1913, the FOMC has the power to either keep these purchased securities till the time they mature or sell them off as and when they find it appropriate.
In simpler words, this whole process starts the moment FOMC’s meeting results are out. They first reach the System Open Market Account manager, who then informs the trading department of the Federal Reserve Bank of New York. Finally, as per the results, government securities are transacted on the open market to meet the FOMC orders.
All of these transactions by the Fed are done to meet the federal funds rate. The federal funds rate is the final target interest rate set by the FOMC, and commercial banks are supposed to borrow or lend their excess reserve at this rate. The federal funds rate, as a result, directly impacts various short-term rates. It also indirectly impacts long-term rates, supply of credit, demand for investment, employment, foreign exchange rate, and economic output.
An example of a Federal Open Market Committee policy
In the annual organizational meeting conducted on the 29th of January, 2019, the Federal Open Market Committee collectively reasserted its “Statement of Longer-Run goal and Monetary Policy Strategy.” The statement had one renewed reference, which stated an average of the estimates made by the participants on the long-run normal rate of unemployment in the “Summer of Economic Projections” (December 2018).
The FOMC made this statement based on an obligation from Congress to fulfill a statutory mandate of promoting higher employment, moderate long-term interest rates, and stable prices. FOMC is free to state a long-term inflation goal as monetary policy identifies inflation rate over the long term. The FOMC, in its statement, also reiterated its analysis that a 2% target inflation rate has proven to be the most consistent with its statutory mandate.
The twelve members of the FOMC – seven Board of Governors and five Federal Reserve Bank presidents – are classified into three categories. These are – hawks, doves, and centrists. Hawks are those members who prefer tight monetary policy, and doves are those who incline towards a stimulus. Lastly, centrists, also called moderates, are neither here nor there, meaning they prefer a middle ground.
Who are the current members of the FOMC?
Jerome Powell holds the Chair of the FOMC and the Chair of the Board of Governors. He was sworn in on the 5th of February, 2018, and he falls in the group of moderates. The other Federal Open Market Committee members include Randall Quarles, Richard Clarida, Michelle Bowman, Patrick Harker, Robert Kaplan, Neel Kashkari, Loretta Manster, and Lael Brainard. As of December 12, 2020, the other two positions are vacant.
Current Vice-Chair of the Federal Open Market Committee, John C. Williams, who took office on 18th June 2018, is also the 11th Federal Reserve Bank of New York’s president and the Chief Executive Officer of the Second District Federal Bank of New York.
Typically, presidents of the Reserve Banks serve a year’s term on a 3-year rotational basis. But presidents of the banks of Chicago and Cleveland are exceptions here as they serve on a two-year rotational basis. Unlike these presidents, the Federal Reserve Bank of New York’s president serves continuously.
To ensure that all US cities have a fair representation, a geographic-group system is followed. One Reserve Bank president from each of the groups mentioned below always comprise the one-year rotating seats of the FOMC –
- Boston, Philadelphia, and Richmond
- Cleveland and Chicago
- St. Louis, Dalla, and Atlanta
- Kansas City, Minneapolis, and San Francisco
When is the next FOMC meeting?
The next FOMC meeting is from 15 to 16 June 2021. FOMC holds eight scheduled meetings per year. However, the FOMC calendar is quite irregular, and time meeting changes are possible.
The media holds a great interest in the meetings of the Federal Open Market Committee. Although eight meetings are supposed to happen in a year, more can be organized if needed. And the fact that all these meetings of FOMC are conducted behind closed doors makes them a topic of great discussion. Analysts try to predict the outcome. They speculate whether the decision will be made to tighten or loosen the supply of money, which will only end up causing an increase or decrease in interest rates. However, lately, the Federal Open Market Committee meeting minutes are public once the meetings wrap up.
In these meetings, discussions about the local as well as global financial markets, happen. Their development is talked about, and financial predictions are made. All the twelve participants present their thoughts on the current economic standing and discuss which monetary policy would be the best for the country’s growth. Only after proper consideration, designated members of the FOMC vote upon a policy that they think would benefit the term.