Tag Archives: Committee

Role of Federal Open Market Committee in Monetary Policy of United States

Federal Open Market Committee (FOMC) is the group which makes the monetary policy for Federal Reserve System. FOMC makes significant decisions about the interest rates and growth of money supply of the United States.

The Federal Open Market Committee supervises the open market operations of the country. The open market operations are selling and buying of United States Treasury securities. It is basically the Federal Reserve committee which makes the key decisions about the growth and the interest rates of the money supply of United States.

The Federal Open Market Committee makes the principal component of national monetary policy of United States. The committee establishes the monetary policy by specifying short term objectives for all those operations that is presently a target level for federal funds rate. This is the rate which the commercial banks charge between themselves for the overnight loans.

The FOMC directs processes undertaken by Federal Reserve System in the foreign exchange markets, although the intervention in the foreign exchange markets is coordinated with US Treasury that has the responsibility for devising the US policies regarding exchange value of dollar.

There are a total of twelve voting members of FOMC, consisting of 7 members of the Board of Governors and 5 presidents of 12 Federal Reserve Banks. The President of Federal Reserve Bank of the New York is considered the permanent voting member of this Committee and presidents of other Reserve Banks serves the one year term as the voting members in rotation which is established by law.

9 of Reserve Bank Presidents have the right to vote one year out of each three, while Presidents of Federal Reserve Banks of Chicago and Cleveland vote in the alternate years. The President of the Federal Reserve Bank is the stable voting member of Committee and the president of other Reserve Banks serve the one year term as the voting members in rotation which is directed by law.

Going by law, the FOMC should meet at least 4 times a year, in the recent years; it needs to meet 8 times in a year. All meetings are attended by members of Board of Governors, the Presidents of 12 Federal Reserve Banks, and also by some of the senior Federal Reserve staff members.

The Federal Open Market Committee was developed by Banking Act 1933. At that time, the committee did not include the voting rights for Board of Governors. The Banking Act of the year 1935 revised all these protocols to include Board of Governors and to resemble the current day FOMC. It was amended in the year 1942 to offer us the present structure of 12 voting members, 7 members of Federal Reserve Board and 12 Federal Reserve Bank presidents.

All of Reserve Bank Presidents, and even those who’re currently voting as FOMC members, must attend the committee meetings. He should participate in the discussions and contribute to the assessment committee of the policy and economy options. The committee meets 8 times in a year, approximately once each 6 weeks.