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Federal Open Market Committee

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Janet Yellen image

FOMC Chair Janet Yellen (2014 - 2018) is more concerned about unemployment than inflation.

Credit: Federal Reserve San Francisco
Greenspan Bernanke

FOMC Chairmen Alan Greenspan (1987-2006) and Ben Bernanke (2006-2013)

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FOMC Chair Paul Volcker (1979-1987)

FOMC Chair Paul Volcker (1979-1987)

Credit: Win McNamee/Getty Images

What Is the FOMC?

The Federal Open Market Committee (FOMC) is the monetary policy arm of the Federal Reserve, the central bank of the United States. This means the Committee is responsible for fighting inflation and unemployment.

It does this by adjusting interest rates. It lowers rates to spur economic growth and reduce unemployment (expansionary monetary policy). That makes money more liquid, stimulating the economy. If the economy grows too fast, then prices rise, causing inflation. 

The FOMC raises interest rates to reduce inflation (contractionary policy). That makes money more expensive, slowing the economy down. A slower economy means that businesses can't afford to raise prices without losing customers, and may even lower prices to gain customers. This lowers inflation.

What Does the FOMC Do?

The Committee adjust interest rates by setting a target for the Fed funds rate. This is the rate that banks charge each other for overnight loans known as Fed funds. Banks use these loans to make sure they have enough to meet the Fed's reserve requirement. Banks must keep this reserve each night at their local Federal Reserve bank, or in cash in their vaults.

The Committee announces its decisions at its eight meetings per year. It explains its actions by commenting on how well the economy is performing, especially inflation and unemployment. Find out what was done at the latest FOMC meeting.

Although the FOMC sets a target for the Fed funds rate, banks actually set the rate itself. The Fed pressures banks to conform to its target with its open market operations. The Fed purchases securities, usually Treasury notes, from member banks. When the Fed want the rate to fall, it buys securities from banks. In return, it adds to their reserves, giving the bank more Fed funds than it wants. Banks will lower the Fed funds rate to lend out this extra reserve. Conversely, when the Fed wants rates to rise, it replaces the bank's reserves with securities. This reduces the amount available to lend, forcing the banks to increase rates.

Since the 2008 financial crisis, the FOMC greatly expanded its use of open market operations. This is called Quantitative Easing. This means it purchases massive amounts of not just Treasury notes, but also mortgage-backed securities, to achieve its goals.

The FOMC usually lowers the discount rate when it adjusts the Fed funds rate. This is the rate it charges its member banks to borrow at its discount window. Banks only borrow from the Fed when they can't borrow from other banks for whatever reason.

The FOMC has set a target inflation rate of 2%. That means it wants prices to increase around 2% each year. This sets up expectations of inflation, and it motivates consumers to buy now rather than later. A mild inflation rate spurs demand, and that's good for economic growth.

FOMC Members

The FOMC has twelve members:

  • The seven members of the Federal Reserve's Board of Governors: Chairman Janet Yellen, Stanley Fischer (Vice-President , a new designation), Jerome Powell, Lael Brainard, Daniel Tarullo . Two positions remain unfilled.
  • The president of the New York Federal Reserve Bank, Vice-Chairman William Dudley.
  • Four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis),  Loretta Mester (Cleveland), Charles Plosser (Philadelphia).

The remaining Federal Reserve bank presidents also attend: Eric Rosengren (Boston), Jeffrey Lacker (Richmond), Dennis Lockhart (Atlanta), James Bullard (St. Louis), Charles Evans (Chicago), Esther George (Kansas City), John Williams (San Francisco), and Christine Cumming (First Vice President New York).

How the FOMC Affects You

The FOMC affects you through control of the Fed funds rate. Banks use this rate to guide all other interest rates. As a result, the Fed funds rate controls the availability of money to invest in houses, business and ultimately in your salary and investment returns.  This directly affects the value of your retirement portfolio, the cost of your next mortgage, the selling price of your home, and the potential for your next raise. Pay close attention to the FOMC meeting announcements so you can anticipate economic changes and take steps to enhance your personal finances. Article updated June 21, 2014.

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