What is the Federal Open Market Committee (FOMC)?
The Federal Open Market Committee (FOMC) is a branch of the U.S. Federal Reserve
Board that is responsible for setting key interest rates and determining the
overall direction of monetary policy.
The board holds meetings several times per year to decide upon whether to
change or maintain the direction of current policy. If the board decides to
change policy, this would involve the purchase or sale of U.S. government
securities to help stimulate economic growth.
How is the Federal Open Market Committee (FOMC) Structured?
The Federal Open Market Committee (FOMC) comprises of seven members, who form the board of governors, plus five Federal Reserve Bank presidents. Traditionally, the FOMC chairman also fills the position of Chair of the Board of Governors, and the position of FOMC vice-chairman is filled by the President of the Federal Reserve Bank of New York.
One of the five Federal Reserve Bank president seats is held permanently by the President of the Federal Reserve Bank of New York. To ensure that all areas of the U.S receive fair and equal representation, the other four seats are filled by presidents from other Reserve Banks, who serve one-year terms on a three-year rotation. These seats are always filled by one president from each of the following groups:
· Boston, Philadelphia or Richmond
· Cleveland or Chicago
· St. Louis, Dallas or Atlanta
· Kansas City, Minneapolis or San Francisco
Why is the Federal Open Market Committee (FOMC) Important?
Experienced investors always keep an eye on the movements of
the Federal Open Market Committee (FOMC), due to their ability to raise or
lower key interest rates by decreasing or increasing the flow of money into the
economy. As interest rates have a significant impact on the value of financial
assets including stocks, bonds and currencies, it is important to be aware of
the FOMC’s decisions on monetary policy.
During times of inflation, the Federal
Open Market Committee (FOMC) will tighten money supply by selling U.S.
government securities. This will limit the number of dollars in circulation,
causing interest rates, in other words, the cost to borrow money, to rise.
During times of deflation, the Federal Open Market Committee (FOMC) will purchase securities to increase the money supply to the economy and to stimulate spending. As this will increase the number of dollars in circulation, interest rates will fall.