The FOMC, a branch of the Federal Reserve System, determines the direction of monetary policy primarily through the execution of open market operations (OMOs).
Open market operations involve purchasing and selling securities in the open market. When the Federal Open Market Committee (FOMC) acquires securities, they are deposited into the Federal Reserve’s System Open Market Account (SOMA). This account is comprised of both domestic securities as well as portfolios of foreign currencies. The domestic portion includes U.S. Treasury bonds and securities from federal agencies, and the foreign portfolio contains assets denominated in the euro and Japanese yen.
The Federal Open Market Committee (FOMC) can hold the securities it possesses until they reach their maturity date or dispose of them when it deems appropriate. This authority is provided by the Federal Reserve Act, established in 1913, and the Monetary Control Act, passed in 1980. A portion of the Fed’s Open Market Account (SOMA) assets is distributed among the twelve regional Federal Reserve Banks. Nevertheless, the Federal Reserve Bank of New York executes all Fed’s open market transactions.
In essence, the FOMC’s open market operations consist of multiple steps. The procedure starts when the FOMC convenes for a scheduled meeting. Subsequently, the outcomes of this meeting are conveyed to the manager of the SOMA, who in turn communicates these to the trading desk at the Federal Reserve Bank of New York. Following this, the New York Fed conducts securities transactions on the open market to modify the amount of reserve balances available, thereby maintaining the federal funds rate in close alignment with the target set by the FOMC.
FOMC Members
The FOMC is composed of 12 members, which includes the seven Board of Governors members from the Federal Reserve System, the New York Federal Reserve Bank’s president, and four presidents from the other eleven Reserve Banks who each serve for one-year terms on a rotating.
The rotating seats are filled by presidents from four different groups of Banks, with one president representing each group: consisting of Boston, Philadelphia, and Richmond; the group that includes Cleveland and Chicago; the group made up of Atlanta, St. Louis, and Dallas; and the group comprising Minneapolis, Kansas City, and San Francisco.
Reserve Bank presidents who do not have voting rights are present at the committee’s meetings, engage in the discussions, and add to the committee’s evaluation of the economic situation and the choices for policy.
Members of the committee typically fall into three types: hawks who advocate for tighter monetary policies, doves who favor economic stimulus programs, and centrists or moderates who hold intermediate positions between the two extremes.
Historically, the person who serves as the chair of the Federal Open Market Committee (FOMC) concurrently holds the position of chair of the Board of Governors.
FOMC Meetings
The FOMC convenes for eight routine meetings annually, although the frequency can increase if circumstances require it.
During the gathering, the Federal Open Market Committee (FOMC) examines the current state of domestic and international financial markets and economic forecasts. Every attendee, including the members of the Board of Governors and the presidents of all 12 Reserve Banks, contributes their perspectives on the nation’s economic condition and deliberates on the most advantageous monetary policy for the United States.
Following much deliberation among all involved parties, solely those individuals appointed as members of the FOMC possess the authority to cast votes regarding the monetary policy. This decision culminates in purchasing or selling securities in the open market.
The meetings are conducted privately, which leads to close monitoring and speculation by Wall Street. Typically, the stock market exhibits a significant response to alterations in monetary policy. In the past few years, the minutes from the FOMC sessions have been released following each meeting.
