Federal Open Market Committee (FOMC)

Definition

The term Federal Open Market Committee refers to the members of the Federal Reserve responsible for monetary policy involving the buying and selling of government securities. The Federal Open Market Committee meets several times each year to determine if a change in policy is required.

Explanation

Also referred to as the FOMC, the Federal Open Market Committee consists of twelve members, including the seven members of the Board of Governors, who are responsible for establishing the discount rate and reserve requirement. These three tools (open market operations, the discount rate and reserve requirement) are used by the Federal Reserve to establish the direction of monetary policy in the United States.

In addition to the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Federal Reserve Bank presidents serve on the FOMC on a one-year rotating basis. To ensure the FOMC is geographically representative of the United States, the four groups of Federal Reserve Banks are bundled in the following manner:

  • Boston, Philadelphia, and Richmond
  • Cleveland and Chicago
  • Atlanta, St. Louis, and Dallas
  • Minneapolis, Kansas City, and San Francisco

Reserve Bank presidents that are not members of the FOMC attend the eight regularly scheduled meetings each year and participate in the discussion, but do not have a vote in matters before the committee. During these meetings, the FOMC would vote to change monetary policy, which would result in either the buying or selling of government securities through open market operations. Generally, the purchase of securities (primarily Treasury bonds) injects money into the banking system, thereby stimulating growth in the economy. Conversely, selling securities lowers the money supply, thereby slowing down an overheating economy.

Related Terms

money supplyBoard of Governors, Federal Reserve System, Federal Reserve Bank, Federal Reserve Funds