Federal Open Market Committee

What the FOMC Is: The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

What the FOMC Does: The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

How the FOMC Affects the U.S. Economy: The FOMC sets the Fed Funds Rate, which guides mortgage interest rates and bank loan rates. In so doing, it controls the availability of money to invest in houses, business and ultimately in your salary and investment returns. By doing this, the FOMC is responsible for controlling inflation while avoiding recession.

If the FOMC raises the rate, then money becomes more expensive, which slows 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 will lower inflation. If the FOMC lowers the rate, then money becomes more liquid, which stimulates the economy. If the economy grows too fast, then prices will rise, causing inflation.

The FOMC monthly meetings are watched closely by stock market analysts, since the Fed Funds rate is a leading indicator and generally predict which way the economy will go. Even if the rate is unchanged, the FOMC minutes give a high-level analysis of the U.S. economy. As a result, the stock market reacts to the FOMC meetings in anticipation of changes in the economy.

How the FOMC Affects You: Through control of the Fed Funds rate, the FOMC 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. By following the prouncements of the FOMC and its members, you can anticipate economic changes and take steps to enhance your personal finances.